THE  STOCK  EXCHANG 
FROM  WITHIN 


WILLIAM  C.  VAN  ANTWERP 


UNIVE.SiiY  Of 
c.\l:foskia 

SAN  dlEGO 


THE  STOCK  EXCHANGE 
FROM   WITHIN 


THE 

STOCK    EXCHANGE 

FROM   WITHIN 

BY 

W.  C.  VAN  ANTWERP 


Garden  City        New  York 

DOUBLEDAY,  PAGE  &  COMPANY 

1914 


Copyright,  1913,  by 
William  C.  Van  Antwerp 

All  rights  reserved,  including  that  of 

translation  into  foreign  languages^ 

including  the  Scandinavian 


3 1  ST    THOUSAND 

First  printing,  Jan.,  1913. 
Second  printing,  Apr.,  1913. 
Third  printing,  June,  1913. 
Fourth  printing,  Feb.,  1914. 


PREFACE 

In  so  far  as  these  pages  reflect  the  thoughts  of  a 
busy  stockbroker,  distracted  by  many  duties  and 
lacking  in  literary  skill,  they  have  but  little 
merit  and  the  writer  entertains  no  illusions  regard- 
ing them.  But  in  the  many  quotations  from  the 
writings  of  the  world's  foremost  economists  that 
are  here  presented,  and  in  the  various  legal  and 
historical  precedents  cited,  perhaps  it  is  not  too 
much  to  hope  that  this  book  possesses  some  slight 
value  as  a  contribution  to  the  vexed  and  vexing 
discussion  of  the  Stock  Exchange,  and  that  it 
may  serve  in  some  degree  both  to  dull  the  sharp 
edge  of  uninformed  criticism  and  to  strengthen 
the  hands  and  hearts  of  loyal  friends  of  a  greatly 
misunderstood  institution.  The  public  is  asked 
to  disregard  the  utterances  of  demagogues  and 
self-seekers  and  to  consider  facts.  That  done,  the 
American  spirit  of  fair  play  may  be  confidently 
relied  upon. 

The  Stock  Exchange  authorities  have  had  no 
hand  in  the  preparation  of  the  work,  nor  does  it 
bear  their  endorsement.  I  say  this  lest  it  be 
thought  an  official  apologia.  Had  it  been  such, 
the  work  would  have  been  much  more  skillfully 
done,  and  its  value  greatly  enhanced. 

The  Author. 


, CONTENTS 

Preface 

V 

CHAPTER 

PAGE 

I.     The  Functions  of  the  Stock  Exchange 

3 

II.     The  Uses  and  Abuses  of  Speculation 

35 

III.     The  Bear  and  Short  Selling 

71 

IV.     The  Relationship  Between  the  Banks 

and  the  Stock  Exchange       .        .       99 

V.     Publicity  in  Exchange  Affairs;   Cau- 
tions and  Precautions      .        .        .131 

VI.     Panics,  and  the  Crisis  of  1907   .        .183 

VII.  A  Brief  History  of  Legislative  At- 
tempts to  Restrain  or  Suppress 
Speculation 223 

VIII.     The  Day  on  'Change,with  Suggestions 

for  Beginners 261 

IX.  The  London  Stock  Exchange,  and 
Comparisons  with  Its  New  York 
Prototype 323 

X.     The  Paris  Bourse;   a  Monopoly  Un- 
der Government       ....     383 

Appendix.     The  Report  of  the  Hughes  Com- 
mission     .        .        .        .        .        .415 

Index. 447 


CHAPTER  I 

THE    FUNCTIONS    OF    THE    STOCK   EXCHANGE 


CHAPTER  I 

THE    FUNCTIONS    OF   THE    STOCK   EXCHANGE 

Every  now  and  then  some  one  who  has  not  given 
much  thought  to  the  matter  asks  the  questions, 
"Of  what  real  use  is  the  Stock  Exchange?" 
"What  does  it  accomplish?"  "Is  it  a  necessary 
and  useful  part  of  our  economic  life,  or  is  it  merely 
a  means  of  promoting  speculation  and  gambling?" 
These  are  fair  questions,  and  they  are  asked  in 
good  faith.  To  be  sure  they  have  been  answered 
many  times  by  writers  on  economic  subjects,  but 
the  trouble  is  that  in  our  hurried  American  life 
we  do  not  read  the  economists,  preferring  to  get 
our  impressions  from  the  hasty  utterances  of  some 
one  who  knows  no  more  about  it  than  we  do. 

The  study  of  any  form  of  economic  develop- 
ment, like  the  study  of  sciences  and  philosophies, 
requires  infinite  patience.  But  the  "man  in  the 
street"  is  bored  to  death  by  such  methods;  he 
wants  to  take  a  short  cut  to  his  conclusions;  merely 
tasting  the  Pierian  spring  he  hurries  on  to  judg- 
ments that  are  superficial,  haphazard,  and  often 
crude  and  blundering.     And  yet  at  bottom  this 

3 


4     THE  STOCK  EXCHANGE  FROM  WITHIN 

man,  a  good  citizen  with  an  open  mind,  invari- 
ably wants  the  truth.  He  may  be  too  busy  to  dig 
it  up  himself,  but  he  knows  it  when  he  sees  it,  and 
once  he  has  grasped  it  he  has  no  patience  with 
those  who  seek  to  turn  him  from  it.  To  this 
average  man,  who  holds  in  his  hands  the  balance 
of  power  in  America,  I  venture  to  say  something 
about  markets.  , 

The  first  thing  a  man  asks  when  he  wishes  to 
buy  is  "the  price."  Every  minute  of  the  day,  all 
over  the  world,  that  question  is  on  men's  lips. 
As  it  is  a  necessary  prelude  to  all  forms  of  trade, 
it  follows  that  everything  that  enters  into  the 
making  of  prices  becomes  at  once  of  primary  im- 
portance. The  more  scientific  the  price,  and  the 
nicer  and  more  accurate  the  making  of  it,  the 
better  the  bargain  for  both  buyer  and  seller  and 
for  trade  generally,  bearing  in  mind  the  distinction 
between  prices,  which  are  temporary  and  move 
rapidly  —  and  values,  which  are  intrinsic  and 
move  slowly.  The  price  of  a  thing  is  what  you 
can  get  for  it;  the  value  is  its  real  worth  to  you, 
and  hence  it  cannot  be  defined  or  measured,  since 
a  thousand  considerations  may  enter  into  it,  such 
as  caprice,  sentiment  or  association.  If  real  values 
could  be  determined,  they  would  necessarily  be 
identical  with  prices,  but  as  they  cannot  be  ascer- 
tained in  ordinary  commodities  of  trade,  prices 


FUNCTIONS  OF  THE  STOCK  EXCHANGE     5 

become  the  really  essential  considerations  and 
values  the  subordinate  ones.  Let  us  see,  then, 
how  prices  are  made,  for  this  is  one  of  the  reasons 
why  exchanges  exist. 

If  you  want  to  buy,  let  us  say,  a  piano,  you  go 
to  the  dealer  and  ask  the  price,  and  as  he  is  the 
only  person  in  the  neighborhood  who  deals  in 
pianos,  you  must  either  accept  his  offer  or  look 
elsewhere.  But  to  look  elsewhere  takes  time  and 
labor;  dealers  In  pianos  are  widely  separated; 
moreover,  there  Is  no  open  competition  among 
them  such  as  you  would  like,  and  so  finally  when 
you  have  bought  you  feel  perhaps  you  have  not 
secured  your  money's  worth.  You  would  have 
secured  a  much  better  bargain,  no  doubt,  had  there 
been  twenty  dealers  in  the  room  competing  with 
each  other,  and  a  still  better  bargain  had  their 
number  been  fifty,  or  a  hundred,  or  two  hundred, 
because  that  would  mean  competition,  and  the 
more  competition  there  Is,  In  close  contact  and 
governed  by  rigid  business  rules,  the  more  certain 
the  approach  to  a  perfect  price.  Everywhere  in 
the  world  fairs  and  other  gatherings  of  merchants 
are  held  at  periodic  intervals  because  people 
demand  them  In  their  effort  to  secure  proper  prices 
by  competitive  bidding  and  offering.  One  of  the 
first  travelers  to  penetrate  the  heart  of  Africa  found 
among   the    natives    this    phenomenon   of   trade, 


6     THE  STOCK  EXCHANGE  FROM  WITHIN 

showing  that  it  is  instinctive;  indeed,  it  may  be 
traced  to  the  earliest  known  period  in  the  history 
of  any  people.  If  you  arise  before  daybreak  in 
London  and  go  to  Billingsgate  and  Covent  Gar- 
den, or  in  Paris  to  the  Halles  Centrales  —  Zola's 
"Ventre  de  Paris"  —  you  will  find  there  the  mod- 
ern type  of  these  markets  in  their  utmost  per- 
fection.* 

This  is  why  Exchanges  exist,  not  only  Stock 
Exchanges,  but  market-places  of  all  kinds:  Buy- 
ers seek  the  largest  market  they  can  get  in  order 
to  obtain  the  lowest  prices;  sellers,  in  order  to 
obtain  the  highest  prices;  and  so  It  was  learned 
long  ago  that  economy  of  time  and  labor,  as  well 
as  a  theoretically  perfect  market,  could  be  best 
secured  by  an  organization  under  one  roof  of  as 
many  dealers  In  a  commodity  as  could  be  found. f 
Bear  in  mind  that  this  result,  moreover,  is  best 
accomplished  when  the  organization  is  so  con- 
trolled by  rigid  rules  of  business  morality  as  to 
insure  to  every  one  who  does  business  there,  great 
and  small,  rich  and  poor,  an  absolutely  square 
deal.  In  such  a  market  every  purchase  is  made 
with  the  most  thorough  acquaintance  with  the 
conditions  involved.  Each  dealer,  each  broker, 
each  speculator,  strives  to  obtain  the  best  knowl- 

*  Principles  of  the  Economic  Philosophy  of  Society,  Government  and 
Industry,  by  Van  Buren  Denslow,  LL.D.,  New  York,  1888,  p.  99. 
t  Ibid.,  D.  107. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE     7 

edge  of  the  supply  and  demand,  and  the  earliest 
news  that  may  affect  it,  and  each  buyer  or  seller 
has  an  equal  and  a  fair  opportunity  to  profit  by 
the  resultant  effect  on  the  market  of  all  these 
various  agencies.  The  larger  the  body  of  brokers 
and  traders,  then,  the  more  accurate  the  standards 
of  value  thus  created.  It  is  a  pity  you  could 
not  have  bought  your  piano  under  such  con- 
ditions.* 

Demagogues  have  set  the  agricultural  classes 
against  Wall  Street  and  against  Exchanges,  but 
producers  everywhere,  in  default  of  exchanges, 
are  forming  quasi-exchanges  of  their  own.  Every 
day  we  hear  of  combinations.  Farmers'  Alliances, 
rural  co-operative  movements,  etc.,  each  designed 
to  regulate  the  market  for  eggs,  butter,  potatoes, 
and  such  things,  and  each  having  for  Its  purpose 
the  very  functions  which  govern  a  Stock  Exchange 
in  its  own  field  — namely,  the  establishment  of  a 
fair  price  under  the  nearest  possible  approach  to 
ideal  conditions.  It  Is  now  proposed  In  Congress 
that  the  Department  of  Agriculture  shall  collect 
and  transmit  to  the  agricultural  districts  by  tele- 
phone and  telegraph  all  available  Information 
concerning  price  movements,  markets,  and  cen- 
tres of  supply  and  demand,  this  again  embodying 

*  Ibid ,  p.  loi.     Consult  also  "Theory  of  Political  Economy,"  by  W.  S. 
Jevons,  p.  92,  and  "  A  History  of  Prices,"  by  Thomas  Tooke,  Part  II,  p.  46. 


8     THE  STOCK  EXCHANGE  FROM  WITHIN 

the  essential  functions  performed  in  its  own  field 
by  a  great  exchange. 

In  practice,  of  course,  there  can  be  no  exchange 
to  deal  in  perishable  products  of  the  farm,  and  this 
is  a  pity,  because  if  such  an  exchange  were  practi- 
cable we  should  hear  less  of  our  old  friend  the  cost 
of  living.  Why?  Because  at  present  the  market 
for  these  commodities  is  controlled  by  commission 
dealers  and  by  middlemen.  The  producer  and 
the  consumer  are  alike  at  the  mercy  of  these 
people;  the  price  is  fixed  by  them;  the  number  of 
bona  fide  dealers  actually  bidding  against  each 
other  is  limited,  in  many  instances  there  is  no  com- 
petition whatever;  the  producer  and  the  com- 
mission dealer  are,  moreover,  widely  separated; 
the  man  who  sells  has  few  sources  of  information, 
and  it  is  the  business  of  the  dealer  who  buys  to 
see  that  he  gets  none;  the  small  producer  there- 
fore has  to  submit  to  a  great  inequality  in  price, 
and  often  to  downright  cheating.  There  is  no 
standard.  There  are  no  rules  governing  the 
dealer,  and  no  high-minded  board  to  enforce  his 
honesty.  Naturally  this  sort  of  thing  contrib- 
utes to  the  cost  of  living,  since  the  commission 
dealer,  on  his  part,  regulates  his  profits  just  in 
proportion  to  the  ignorance,  cupidity  or  remote- 
ness of  the  farmer,  while  the  middlemen,  of  whom 
there  are  sometimes  three  or  four,  apply  the  same 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    9 

iniquitous  processes  to  the  ultimate  purchaser  — 
who  happens  to  be  you  or  me.  Every  thinking 
man  knows  that  this  is  rank  economic  error.* 

A  friend  of  mine  owns  a  thousand-acre  farm  in 
the  Shenandoah  Valley,  where  he  raised  this  year 
10,000  baskets  of  peaches.  He  decided  to  seek 
one  buyer,  and  he  found  him  in  the  person  of  a 
Baltimore  canner,  who  went  down  to  Virginia, 
inspected  the  crop,  and  contracted  for  the  lot 
on  a  basis  of  ^i  for  firsts,  70  cents  for  seconds, 
and  40  cents  for  thirds,  delivered  at  Baltimore. 
Shortly  after,  the  market  was  flooded  with  peaches 
from  Georgia,  and  the  Baltimore  man,  seeing  that 
the  crop  would  be  plentiful,  promptly  "welched" 
on  his  trade,  basing  his  action  on  the  absurd  con- 
tention that  "firsts"  should  be  three  inches  in 
diameter,  although  as  every  one  knows  peaches 
of  this  size  are  almost  never  to  be  had.  This 
action  threw  all  the  grower's  peaches  into  third 
class,  which  delivered  at  Baltimore  would  have 
netted  him  about  10  cents  a  basket. 

In  desperation  he  looked  elsewhere.  West,  North, 
and  South,  only  to  hear  the  same  monotonous 
answer  from  commission  men,  "we  won't  buy,  but 
we  will  handle  your  crop  on  a  commission  of  10  per 
cent."   Meantime  the  crop  was  ripening.   To  make 


*  Consult  Report  of  the  New  York  State  Food  Investigating  Commission, 
September,  191 2. 


lo   THE  STOCK  EXCHANGE  FROM  WITHIN 

matters  worse  the  railroad  levied  a  prohibitive 
price,  and  refrigerator  cars  were  not  to  be  had. 
Finally  there  was  nothing  left  but  to  ship  by  ex- 
press and  trust  to  the  commission  men  to  treat  him 
honestly".  The  final  accounting  showed  that  on  his 
first  shipment  he  netted  5I  cents  a  basket,  and  on 
his  second,  15  cents,  not  counting  the  expense  of 
picking,  packing,  and  hauling.  So  much  for  the 
producer.  The  consumer  fared  no  better,  for  he 
had  to  pay  $1.25  per  basket  for  this  fruit;  one  of 
this  producer's  friends  actually  purchasing  a  por- 
tion of  this  very  consignment  at  that  rate.  The 
difference  therefore  between  15  cents  and  $1.25 
contributes  some  food  for  thought  as  to  the  cost 
of  living.* 

Now  contrast  this  experience  of  a  grower  having 
no  exchange  facilities  with  that  of  the  Western 
farmer  who  deals  directly  with  a  Grain  Ex- 
change. The  farmer  can  sell  his  crop,  even  though 
it  has  not  been  planted.  Whenever  he  sells,  and 
under  whatever  conditions,  he  enjoys  the  authori- 
tative establishment  of  a  price,  fixed  as  clearly  as 
matters  are  fixed  in  law.  Moreover,  the  price 
at  which  he  elects  to  sell  is  the  best  price,  the 
fairest  price,  and  the  most  scientific  price  that 
human  agencies  can  arrive  at,  because  it  is  made 

*  A  detailed  account  of  this  incident  was  published  in  Country  Life  in 
America,  July  i,  1912,  from  the  pen  of  Graham  F.  Blandy,  the  producer. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    ii 

by  world-wide  competitive  bidding  at  the  hands 
of  skilled  men  in  Chicago,  in  New  York,  in  Liver- 
pool, in  Berlin,  in  Odessa,  and  in  the  Argentine, 
all  competing  by  cable  and  telegraph.  Think  of 
the  confidence  he  enjoys,  and  the  liberty  of  action; 
think,  too,  what  it  means  to  him  to  know  that  the 
Exchange  through  which  he  deals  is  a  body  of 
honorable  men,  governed  by  rules,  bidding  pub- 
licly under  one  roof. 

But,  you  will  say,  this  is  all  very  well  in  its 
application  to  a  grain  or  cotton  exchange,  but  how 
does  it  apply  to  the  Stock  Exchange.^  You  con- 
cede that  scientific  price-making  for  commodities 
like  grain  and  cotton  is  highly  necessary,  but  you 
do  not  see  that  the  same  necessity  exists  for  stocks 
and  bonds.  You  feel,  no  doubt,  that  the  one  has 
to  do  with  food  and  raiment  and  is  therefore  in- 
dispensable, while  the  other  merely  serves  to 
stimulate  speculation  and  gambling,  and  hence  is 
altogether  unnecessary.  Now,  in  order  to  ex- 
plain the  error  in  this  point  of  view,  let  us  first  see 
how  bits  of  paper,  called  securities,  came  into 
being. 

Long  after  Europe  had  emerged  from  the  dark 
centuries  following  the  fall  of  the  Roman  Empire, 
the  needs  of  states  and  governments  impelled 
their  rulers  to  resort  to  credit,  and  it  was  dis- 
covered that  the  simplest  way  to  do  it  was  to 


12    THE  STOCK  EXCHANGE  FROM  WITHIN 

issue  securities,  that  is  to  say,  certificates  of  the 
debt.  Next,  it  was  found  that  in  order  to  insure 
success  for  these  operations,  a  market  was  required. 
Intermittent  or  temporary  sources  from  which 
credit  could  be  obtained  was  not  enough;  C07istant 
sources  of  credit  were  essential,  and,  as  these  con- 
stant sources  lay  in  the  savings  of  the  people, 
public  markets  in  which  investors  could  tell  the 
value  of  their  investments  from  day  to  day  followed 
as  a  natural  course.* 

As  time  went  on  —  necessarily  the  evolution 
was  gradual  —  it  was  learned  that  companies 
having  to  do  with  all  forms  of  business  enterprises 
might  also  be  formed  on  the  same  basis.  The 
development  of  the  world's  business  outgrew  its 
infancy  days  of  private  partnerships,  and  corpo- 
rate organization  of  necessity  took  their  place, 
now' that  the  discovery  of  credit,  through  the  use 
of  securities,  had  pointed  the  way.  This  cor- 
porate  organization,   which    combines    the   small 


*  Bourses  or  Exchanges,  as  we  know  them  to-day,  undoubtedly  owe  their 
origin  to  the  Jews.  M.  Vidal's  scholarly  work  explains  that  the  persecutions 
which  those  untiring  and  courageous  merchants  experienced  in  Spain 
after  the  expulsion  of  the  Moors  caused  them  to  emigrate  to  Holland,  where 
the  market-place  was  called  Chatige  (Exchange)  and  where  in  later  years 
there  was  to  be  established,  aa  s  result  of  their  labors,  the  famous  Bank  of 
Amsterdam,  which  was  for  a  century  the  foremost  institution  of  its  kind 
in  the  world.  The  modern  use  of  the  word  Change  or  Exchange  is  thus 
plainly  traced.  The  word  Bourse  originated  at  Bruges,  where,  according 
to  one  authority,  merchants  gathered  at  the  house  of  one  of  their  number 
known  as  van  der  Burse.  Other  historians  state  that  the  word  originated 
from  the  three  purses  (bourses)  carved  on  the  gable  of  the  house  in  which 
the  meetings  were  held. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE     13 

savings  of  thousands  into  large  sums  and  gives  to 
the  masses  an  intelligent  directing  force  at  the 
hands  of  highly  trained  experts,  depends  for  its 
existence  on  the  sale  of  its  securities. 

In  order  to  understand  that  there  can  be  no 
industrial  progress  without  the  issue  of  securities 
let  us  consider  the  locomotive  engine.  When  in 
the  early  1800's  it  became  apparent  that  this  con- 
trivance could  be  used  to  operate  an  entirely  new 
method  of  transportation,  people  looked  upon  it, 
at  first,  as  an  interesting  but  quite  useless  con- 
trivance, because  to  build  railroads  was  an  expen- 
sive undertaking  and  nobody  had  enough  money 
to  finance  it.  The  inventor's  genius  was  not  suf- 
ficient; another  power  was  necessary  to  take  it  out 
of  purely  scientific  hands  and  give  it  practical 
impulse.  That  power  was  credit;  the  way  it  was 
obtained  was  through  the  issue  of  securities,  and 
the  way  securities  were  made  popular  vehicles  of 
investment  lay  in  providing  a  daily  market  for 
buyers  and  sellers. 

As  a  natural  result,  organization  followed.  Cap- 
ital was  consolidated,  the  rights  of  owners  were 
established,  a  great  impulse  was  given  to  various 
new  forms  of  inventive  genius  and  powerful  com- 
mercial enterprises  of  all  kinds  sprang  into  being. 
With  this  development  the  market-places  or 
Stock  Exchanges  without  which  capital  could  not 


14    THE  STOCK  EXCHANGE  FROM  WITHIN 

have  been  enlisted  kept  pace.  It  was  found  that 
transactions  in  the  securities  which  represented 
the  people's  money  should  be  rendered  easy, 
quick,  and  safe,  and  that  the  very  essence  of 
the  Exchange's  functions  consisted  in  protecting 
the  people  who  were  the  actual  owners  of  the 
enterprises  by  rules  that  would  insure  this 
result. 

If  we  look  about  us  to-day  we  find  in  all  the 
great  centres  of  the  world  Stock  Exchanges  at  work 
in  this  important  field.  We  find  that  just  in  pro- 
portion to  the  confidence  which  a  country  feels 
in  the  strength  and  uprightness  of  such  a  market, 
so  enterprise  goes  forward  with  vigor,  and  so  the 
national  wealth  increases.  The  success  of  one 
enterprise  in  its  appeal  to  public  credit  through 
the.  medium  of  the  Stock  Exchange  invariably 
leads  to  another;  thus  commerce  and  industry 
develop.  Securities  in  America  alone,  aggregate 
the  enormous  total  of  forty-three  billion  dol- 
lars.* 

Now,  as  our  country's  entire  physical  properties 
are  valued  at  one  hundred  and  thirty  billions,  it  is 

*  Charles  A.  Conant,  "The  World's  Wealth  in  Negotiable  Securities," 
Atlantic  Mo7ithly,  January,  1908,  estimated  the  total  American  securities  as 
of  190S,  at  $34,514,3151,382.  Since  that  time  there  has  been  added  to  the 
securities  listed  on  the  New  York  Stock  Exchange  alone,  a  total  averaging 
about  one  billion  dollars  per  annum.  The  total  given  above  is,  therefore,  a 
conservative  one,  since  I  have  added  to  Mr.  Conant's  1905  estimate  only 
Stock  Exchange  additions,  and  have  taken  no  account  of  the  millions  added 
by  small  corporations. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE   15 

apparent  (after  making  allowances  for  securities 
that  are  held,  by  holding  companies  and  hence  are 
duplicated  in  the  foregoing  estimates)  that  the 
nation's  securities  represent  more  than  a  third  of 
the  nation's  wealth.  Again,  almost  two  million 
people  are  owners  of  these  securities.  The 
Journal  of  Commerce  and  Commercial  Bulletin 
published  Dec.  26,  191 2,  official  statistics  for  247  of 
the  large  corporations.  This  tabulation  revealed 
the  fact  that  the  stock  of  these  247  corporations 
alone  was  owned  by  more  than  a  million  stock- 
holders, and  it  is  therefore  quite  safe  to  infer  that 
the  number  of  shareholders  in  all  American  com- 
panies approaches,  if  it  does  not  exceed,  two 
million.  I  think  it  will  not  be  disputed  that 
where  two  million  people  own  a  third  of  the 
nation's  wealth,  they  are  entitled,  just  as  the 
farmer  is,  to  a  perfectly  constructed  price-making 
machinery  that  will  enable  them  to  invest  their 
savings,  or  sell  their  holdings.  Having  learned 
the  difficult  lesson  of  saving  their  money  and  the 
still  more  difficult  one  of  increasing  their  surplus 
capital  by  judicious  investments,  are  not  these 
people  entitled  to  the  safeguards  aflforded  by  a 
Stock  Exchange.''  "There  is  no  other  way  in 
which  true  prices  can  be  made,"  says  Mr.  Horace 
White.  "  If  the  quotations  so  made  are  not 
precisely  the  truth   in   every  case,  they  are  the 


i6    THE  STOCK  EXCHANGE  FROM  WITHIN 

nearest    approach    to   it   that    mankind    has    yet 
discovered."* 

Think  a  moment.  Until  the  last  century  prop- 
erty and  trade  were  so  insecure  that,  if  a  man 
saved  money,  he  had  to  hide  it,  or  lend  it  through 
money-brokers  at  such  usurious  rates  as  would 
compensate  him  for  what  he  lost  in  bad  debts. 
When  Dr.  Samuel  Johnson  wrote  his  dictionary  in 
1776  no  such  word  as  "investor"  was  known  to  the 
English  language  in  a  financial  sense.  There  were 
pirates  by  sea  in  the  old  days  and  brigands  on 
land.  "Sovereigns  and  nobles,"  says  the  editor 
of  the  Economist,  "extorted  loans  only  to  repu- 
diate them;  governments  supplied  their  needs  by 
debasing  the  coinage,  or  by  issuing  worthless 
money. "t     To-day  all  this  is  changed  by  banks 


*  "  The  Stock  Exchange  and  the  Money  Market,"  "Annals  of  the  American 
Academy  of  Political  and  Social  Science,"  Vol.  XXXVI,  No.  3,  November, 
1910,  p.  567. 

t  If  the  discovery  had  then  been  made  that  bits  of  paper  could  be  used 
as  a  medium  of  giving  mobility  to  capital,  there  would  have  been  a  Stock 
Exchange  at  Rome  eleven  centuries  before  Christ.  M.  Edmond  Guillard's 
study  of  the  subject  shows  that  the  argentarii  (bankers)  were  then  doing 
business  at  the  imperial  city,  and  that  in  addition  to  their  central  offices 
they  had  established  branch  offices  at  the  Forum,  where  they  gathered  daily 
at  a  specified  hour,  together  with  the  merchants,  manufacturers,  and  capital- 
ists, carrying  on  a  business  of  money-changing  in  a  public  market  that 
was,  in  its  essentials,  similar  to  our  public  financial  markets  of  to-day  ("  Les 
Banquiers  Atheniens  et  Romains,  trapezites  et  argentarii,"  Paris,  1875 
Guillaumin).  As  the  business  was  introduced  into  Rome  by  freed  Greek 
slaves,  it  is  perhaps  safe  to  say  that  the  practice  of  dealing  in  public  money- 
markets  is  in  reality  of  still  earlier  origin.  Plautus  alludes  to  the  crowd 
of  merchants  and  bankers  in  the  public  square,  and  many  chroniclers 
record  the  fact  that  at  the  time  of  Appius  Claudius  and  Publius  Sevilius, 
that  is  to  say,  five  centuries  before  Christ,  there  was  a  public  market  in 
Rome  known  as  the  Assembly  of  Merchants  (Collegium  mercatorum). 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    17 

and  Stock  Exchanges.  Yet,  despite  these  great 
inventions,  capital  is  and  always  will  be  timid, 
and  the  small  investor  particularly  must  be  pro- 
tected and  safeguarded  in  every  possible  way. 

These  small  investors,  no  less  than  the  large 
ones,  require  great  convenience  and  promptness 
for  their  operations;  they  live  in  such  widely  re- 
mote parts  of  the  country  as  to  necessitate  the 
placing  of  full  reliance  on  prices  made  by  the 
Stock  Exchange;  they  must  have  the  most  accu- 
rate information;  they  must  know  that  their 
brokers  are  working  to  obtain  the  best  knowledge 
of  supply  and  demand;  they  want  prices  fixed  by 
the  most  scientific  competition  and  by  the  largest 
possible  number  of  competitors — brokers,  specula- 
tors, and  investors  alike;  they  require  a  market  in 
which  thay  can  sell  and  get  their  money  at  once; 
above  all  things  they  must  know  beyond  perad- 
venture  that  they  are  dealing  with  reputable  men 
who  uphold  a  fine  standard  of  honor.  These 
are  added  reasons  why  the  Stock  Exchange  exists.* 


*"A  hundred  years  ago  the  use  of  the  cheque  was  hardly  known  even  in 
London,  and  an  English  country  gentleman  would  have  had  infinitely  more 
trouble  in  making  a  small  investment  than  would  nowadays  a  remote 
Australian  squatter,  or  a  wheat-grower  in  the  wildest  West  of  Canada.  A 
letter  posted  to  London  from  a  distant  village  of  Saskatchewan  in  19 lo 
would  arrive  with  far  more  certainty,  and  perhaps  not  less  speed  than  a 
letter  posted  in  1810  from  a  village  in  Sutherland  or  Argyllshire.  A  penny 
stamp  with  a  cheque  enclosed  in  a  brief  letter  of  instructions  to  the  banker, 
and  the  thing  is  done.  But  the  thrifty  Scot  of  1810  would  have  had  the 
utmost  difficulty,  and  great  expense  as  well  as  risk,  in  converting  a  similar 
amount  of  cash  savings  into  an  interest-bearing  security.     In  1710  the  thing 


i8    THE  STOCK  EXCHANGE  FROM  WITHIN 

If  it  did  not  exist,  there  would  be  no  standard 
market  for  a  large  part  of  the  country's  material 
wealth,  indeed,  as  we  have  seen,  a  very  great  deal 
of  this  wealth  could  not  have  been  created  at  all. 
At  the  risk  of  repetition  let  me  say  that  the  in- 
vestor on  the  one  hand,  and  the  patent  or  the  rail- 
way on  the  other  hand,  have  nothing  in  common. 
Left  to  themselves,  they  would  never  meet'  they 
would  be  useless,  because  resources  and  money 
must  be  brought  together  in  order  to  create  wealth. 
A  primary  function  of  the  Stock  Exchange  is  to 
bring  them  together,  and  by  standardizing  prices, 
create  values.  Similarly,  the  investor,  without 
the  Stock  Exchange  to  guide  him,  would  have 
nowhere  to  turn  for  a  fair  price  secured  by  com- 
petitive bidding.  He  might  turn  to  his  local 
banker,  or  to  individual  and  unorganized  brokers, 
and  trust  to  their  honesty  to  invest  his  savings  for 
him,  but  the  local  banker  and  the  isolated  broker 
would  then  be  in  the  same  position  as  the  com- 


would  have  been  practically  impossible.  The  Bank  of  England  had  only 
just  been  called  into  existence,  and,  in  fact,  there  were  no  bankers,  no 
brokers,  and  no  Stock  Exchange  in  the  modern  sense  of  the  word.  A 
man  who  wished  to  invest,  without  personally  employing  his  capital,  had 
practically  no  choice  but  to  buy  property  and  let  it  out  at  a  rent,  or  lend 
his  money  on  mortgage.  Bank  of  England  Stock  or  National  Debt  had 
just  begun  to  be  a  political  speculation  for  the  moneyed  Whigs  in  London. 
Merchant  venturers  might  risk  a  large  sum  in  a  joint-stock  voyage.  Other- 
wise the  average  Englishman  at  the  beginning  of  the  eighteenth  century 
A.  D.  was  hardly  better  off  for  investment  than  the  average  Athenian  in 
the  age  of  Pericles,  or  the  average  Roman  in  the  days  of  Cicero." —  "The 
Stock  Exchange,"  by  Francis  W.  Hirst,  editor  of  the  Economist,  Wil- 
liams and  Norgate,  London. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    19 

mission  dealer  and  the  middleman  who  played 
such  havoc  with  that  peach  crop.  It  is  painful  to 
conceive  such  a  situation. 

Worse  than  that,  without  a  Stock  Exchange  to 
create  standards  and  define  the  difference  between 
good  and  bad  investments,  very  many  simple 
people  would  be  at  the  mercy  of  an  army  of  dis- 
honest promoters  and  bucket-shops,  for  the  modern 
invention  of  securities  has  brought  with  it  dangers 
and  pitfalls.  The  United  States  once  swarmed 
with  these  bandits  —  they  are  now  rapidly  being 
driven  to  cover  —  but  they  still  ply  their  trade  in 
other  countries,  where  they  flourish  as  "banks"  or 
"investment"  companies.  These  chaps,  to  quote 
the  editor  of  the  Economist  (London),  "have 
bought  a  lot  of  rubbish,  usually  called  'bonds,' 
from  shaky  industrial  concerns  or  from  half  bank- 
rupt states  and  municipalities  of  South  America. 
They  have  bought,  let  us  say,  the  6  per  cent,  bonds 
of  the  Yoko  Silk  Company  in  Japan  at  60,  which 
they  sell  you  at  90,  the  5  per  cent,  bonds  of  the 

Brazilian  Province  of at   55,   which   they 

sell  you  at  75,  and  a  few  other  similar  bargains. 
They  tell  you  that  if  you  spread  your  risks 
scientifically  over  different  countries  you  will  be 
perfectly  safe.  You  perhaps  do  not  realize  that 
none  of  these  securities  which  you  are  advised  to 
buy  are  quoted  in  the  London  Stock  Exchange. 


20    THE  STOCK  EXCHANGE  FROM  WITHIN 

If  they  were  the  game  would  be  impossible." 
Which  is  only  another  way  of  saying  that  if  there 
were  no  Stock  Exchanges  to  uphold  worthy  enter- 
prises and  discourage  bad  ones,  there  would  be 
no  limit  to  the  frauds  practised  upon  gullible 
investors.  And  if  this  is  true  of  a  tight  little 
island  like  England,  how  doubly  true  it  is  in  a 
great  country  like  ours  where  investors  are  so 
widely  scattered. 

The  foregoing  pages  will  serve  to  show  the  in- 
quirer that  what  is  happening  in  commerce,  is 
happening  in  the  securities  which  represent  that 
commerce.  Because  commerce  goes  on  expand- 
ing, securities  must  necessarily  keep  pace  and  the 
Stock  Exchange  must  perforce  grow  in  impor- 
tance. That  much  maligned  individual,  the 
speculator,  now  regards  the  whole,  world  as  his 
field  and  is  eager  to  enter  foreign  markets  wherever 
there  are  opportunities.  In  1910  more  than  three 
billion  dollars  of  British  capital  were  invested  in 
American  railways  alone,  returning  one  hundred 
and  twenty-five  millions  annually  in  interest  and 
dividends,  to  say  nothing  of  the  English  millions 
in  our  lands,  mines,  and  Industrial  enterprises. 
We  too  are  large  holders  of  foreign  securities, 
and  the  list  of  such  holdings  increases  yearly. 
But  it  may  be  accepted  as  a  fact  that  this 
enormous  mass  of  corporate  securities  would  not 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    21 

have  found  ownership  had  there  been  no  Stock 
Exchange  to  market  them,  and  standardize  them, 
and  estabhsh  daily  prices  for  them,  and  give 
them  the  certificate  of  character  that  makes 
them  ideal  collateral  for  obtaining  credit. 

Dr.  W.  Lexis,  of  Gottingen,  like  all  other 
economists,  recognizes  the  fact  that  Stock  Ex- 
changes are  economic  necessities.  Here  are  his 
opinions: 

"The  existence  of  a  broad,  continuous  market  is  an  eco- 
nomic necessity  in  the  modern  scheme  of  widespread  invest- 
ment of  capital.  Even  though  the  market-place  is  largely 
filled  with  speculators,  it  is  plain  that  the  greater  the  number 
of  traders  in  securities,  the  greater  will  be  the  facility  for 
buying  and  selling  any  quantity  of  securities.  The  stock 
market  is  a  powerful  aid  in  floating  new  issues  of  public 
securities.  The  speculative  market  takes  them  at  once  and 
keeps  them  in  the  floating  supply  until  they  have  shown  their 
value.  The  stock  market  also  renders  a  useful  service  in 
giving  a  continuous  guide  to  the  success  or  failure  of  indus- 
trial undertakings,  and  the  worth  of  their  securities.  The 
more  speculators  there  are  trading  in  any  particular  security, 
the  greater  is  the  opportunity  to  learn  the  real  conditions 
of  the  undertaking.  Private  investors,  from  a  study  of  the 
speculative  market  in  the  securities  they  own,  receive  in  this 
way  a  continuous  market  opinion  on  the  condition  of  the 
corporations  in  which  they  are  shareholders."* 

Another  great  service  rendered  by  the  Stock 
Exchange  is  the  means  it  affords  of  readily  trans- 

*  Article  on  "Speculation"  in  Schonberg's  " Handbuch  der  Politischen 
Oekonomie"  (Tubingen,  1896-98). 


22    THE  STOCK  EXCHANGE  FROM  WITHIN 

ferring  securities  from  hand  to  hand.  To  appre- 
ciate the  importance  of  this  fact  you  have  but  to 
think  of  the  difficulties  and  delays  that  attend  the 
transfer  of  other  forms  of  property  that  do  not 
enjoy  Exchange  facilities.  Real  estate,  for  ex- 
ample, is  a  most  excellent  form  of  investment. 
But  suppose  the  owner  of  real  estate  wants  to  sell 
in  a  hurry,  what  then.^  There  is  no  large  organ- 
ized market,  there  is  no  way  by  which  through 
competitive  bidding,  he  can  place  a  correct  esti- 
mate of  the  importance  of  current  events  upon  the 
price  of  his  land.  In  the  urgency  of  his  needs  he 
may  easily  be  misled  by  "smart"  or  unscrupulous 
advisers,  and  this  risk  increases  in  direct  pro- 
portion to  his  remoteness  from  large  market 
centres. 

The  holder  of  securities  listed  on  the  Stock  Ex- 
change is  quite  differently  situated.  He  is  alto- 
gether independent.  He  knows  the  price  of  his 
holdings  every  hour  of  the  day.  He  is  exposed  to 
no  fraud,  and  at  the  mercy  of  no  rumor  and  no 
unscrupulous  dealer.  He  has  positive  assur- 
ance that  in  case  of  necessity,  at  a  moment's 
notice,  he  can  obtain  at  the  prevailing  price  the 
value  in  cash  of  every  Stock  Exchange  security 
in  his  box.  The  ticker  gives  him  instantaneous 
quotations.  All  the  newspapers  publish  author- 
ized prices  for  his  benefit,  and,  as  we  have  just 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    23 

seen,  these  quotations  are  not  a  one-man  affair, 
but  the  combined  judgment  of  thousands  of  ex- 
perts, bulls  and  bears,  bankers  and  brokers,  specu- 
lators and  investors,  all  over  the  world,  bidding 
and  offering  against  each  other  by  cable  and  tele- 
graph and  recording  the  epitomized  result  of  their 
bidding  in  the  prices  current  on  the  Stock  Ex- 
change. Such  a  man  knows,  moreover,  that  the 
price  thus  established  is  not  merely  the  opinion 
of  all  these  minds  as  to  values  to-day,  but  that  it 
represents  a  critical  look  into  the  future.  He 
knows,  indeed,  that  financiers  everywhere  have 
in  mind  prospective  values  rather  than  present 
values,  and  so  he  acquires  a  double  advantage 
in  regulating  his  own  action  by  the  light  of  the 
superior  knowledge  thus  freely  given  him.  The 
importance  of  this  "advance  information"  can- 
not be  overestimated,  and  furnishes  us  with  an- 
other reason  why  Stock  Exchanges  exist. 

In  1906,  for  example,  business  conditions  in  this 
country  were  the  best  ever  known.  Good  crops, 
big  earnings,  and  general  optimism  prevailed. 
But  Stock  Exchange  securities  did  not  advance  in 
the  last  half  of  the  year,  because  trained  financiers 
began  to  foresee  the  first  signs  of  trouble  ahead. 
In  the  early  months  of  1907  this  knowledge  be- 
came more  general,  and  a  severe  decline  took 
place,  notwithstanding  the  fact  that  the  business 


24    THE  STOCK  EXCHANGE  FROM  WITHIN 

of  the  country  at  large  continued  to  be  excellent. 
"What  is  the  matter  with  Wall  Street?"  was 
the  question  in  the  press  and  on  the  lips  of 
the  uninformed,  but  Wall  Street,  or  rather 
the  Stock  Exchange,  was  merely  fulfilling  its 
function  as  a  barometer  and  foretelling  the  com- 
ing storm. 

At  the  height  of  the  autumn  panic,  on  the  other 
hand,  when  the  press  was  filled  with  dire  fore- 
bodings and  the  ignorant  layman  was  frightened 
out  of  his  wits,  securities  stopped  declining  and 
began  to  rise  because  the  Stock  Exchange  mind 
saw  that  the  worst  was  over.  The  brightest 
financial  students  in  the  world  then  began  another 
process  of  discounting  the  future;  the  barometer 
plainly  foretold  the  end  of  the  disturbance.  And 
all  this  information  —  a  fundamental  law  of  price 
movements  which  indicated  clearly  when  the 
trouble  was  coming  and  when  it  had  ended  —  was 
given  gratis  to  the  world  in  the  daily  published 
quotations  of  Stock  Exchange  securities. 

In  another  chapter  I  shall  describe  the  method 
by  which  the  Stock  Exchange  protects  its  patrons, 
the  public.  As  this  is  of  particular  importance  in 
connection  with  the  matters  just  cited,  I  call 
the  reader's  attention  to  the  remarks  of  Prof.  S.  S. 
Huebner,  Ph.D.,  of  the  University  of  Pennsyl- 
vania. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    25 

"Importance  must  be  attached  to  the  protection  and 
safeguards  which  organized  Stock  Exchanges  give  the  stock 
and  bond  holder,  in  regulating  brokerage  transactions  and 
maintaining  a  standard  of  commercial  honor  among  brokers. 

.  .  In  this  connection  it  should  be  remembered  that  the 
constitution  of  nearly  every  Stock  Exchange  defines  the 
object  of  the  Exchange  as  follows:  'Its  object  shall  be  to 
furnish  Exchanges,  rooms  and  other  facilities  for  the  con- 
venient transaction  of  business  by  its  members,  as  brokers; 
to  maintain  high  standards  of  commercial  honor  and  integ- 
rity among  its  members,  and  to  promote  and  inculcate  just 
and  equitable  principles  of  trade  and  business.'  No  person 
can  be  elected  to  membership  until  he  has  signed  the  con- 
stitution of  the  Exchange,  and  by  such  signature  he  obligates 
himself  to  abide  by  the  same,  and  by  all  subsequent  amend- 
ments thereto.  The  value  of  this  organization  becomes 
apparent  when  we  take  account  of  the  gigantic  frauds  per- 
petrated upon  innocent  investors  through  advertising  cam- 
paigns by  persons  unaffiliated  with  any  recognized  Exchange, 
or  by  certain  members  of  unorganized  curb  markets.  .  .  . 
All  Stock  Exchanges  provide  for  the  arbitration  of  disputes 
which  may  occur  between  members,  and  if  both  parties 
are  willing,  between  members  and  their  customers.  They 
also  prescribe  rules  governing  the  nature  of  contracts,  the 
making  of  all  oiTers  and  bids,  the  registry  and  transfer  of 
securities  on  the  transfer  books  of  the  corporations,  and  the 
conditions  upon  which  securities  may  be  listed  upon  the 
Exchange  for  trading  purposes.  Practically  all  stock  Ex- 
changes also  require  that  all  transactions  must  be  real, 
and  that  no  fictitious  or  unreal  transactions  shall  be  per- 
mitted; that  discretionary  orders  cannot  be  accepted  by 
brokers;  and  that  every  member  of  the  Exchange  must  keep 
complete  accounts,  subject  at  all  times  to  examination  by  the 
governing  committee  or  any  standing  or  special  committee 
of  the  Exchange,  and  under  penalty  of  suspension,  no  member 


26    THE  STOCK  EXCHANGE  FROM  WITHIN 

may  refuse  or  neglect  to  submit  such  accounts,  or  wilfully 
destroy  the  same.  Nor  may  any  member,  under  pain  of 
suspension  (a  serious  penalty,  involving  not  merely  the  loss 
■of  the  rights  and  privileges  of  membership,  but  also  the  stigma 
•attaching  to  the  member  as  a  factor  in  the  business  com- 
munity), be  guilty  of  '  any  conduct  or  proceeding  inconsistent 
with  just  and  equitable  principles  of  trade.'  "* 

One  of  the  most  important  functions  of  the 
Stock  Exchange  is,  as  we  have  seen,  the  almost 
automatic  ease  with  which  it  directs  reservoirs  of 
•capital  into  channels  of  usefulness  in  the  world's 
industry  and  commerce.  The  layman  may  feel 
that  this  use  of  the  Stock  Exchange  does  not  affect 
him  as  an  individual,  but  it  does,  and  vitally. 
Every  merchant  and  every  manufacturer,  great 
and  small,  all  over  the  world,  is  directly  benefited 
by  it.  One  may  see,  for  example,  securities  of 
railway  equipment  companies  quoted  for  weeks  at 
a  low  level.  This  shows  that  the  business  of  these 
companies  is  not  profitable,  and  it  serves  to  dis- 
>courage  owners  of  capital  from  undertaking  new 
vcnterprises  in  that  direction,  because  the  securi- 
ties of  such  companies  cannot  be  sold.  Moreover, 
it  shows  investors,  as  plainly,  as  words  can  tell, 
that  this  is  an  unsafe  and  unprofitable  form  of  in- 
vestment. 


*  "Scope  and  Functions  of  the  Stock  Market." — "The  Annals  of  the 
American  Academy  of  Political  and  Social  Science,"  Vol.  XXXV,  No.  3. 
[May,  1910. 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    27 

Reverse  the  situation,  and  lines  of  industry  are 
revealed  where  high  and  advancing  prices  of  se- 
curities indicate  a  rising  tide  of  business,  with  an 
outlook  for  large  profits  in  the  future.  Capital 
then  takes  hold  cheerfully;  there  is  a  market  for 
the  new  securities  and  a  proper  basis  for  fresh  com- 
mercial-development, because  investors  and  specu- 
lators have  learned  from  the  published  daily 
quotations  of  these  Stock  Exchange  securities 
that  there  Is  good  warrant  for  the  flow  of  capital 
into  such  channels,  and  that  a  reasonably  safe 
return  will  follow  an  Investment  in  them.  In 
commenting  upon  these  functions  of  the  Stock 
Exchange,  Mr.  Conant  says:  "Through  the 
publicity  of  knowledge  and  prices,  the  bringing  of  a 
multitude  of  fallible  judgments  upon  this  common 
ground,  to  an  average,  there  is  afforded  to  capital- 
throughout  the  world  an  almost  unfailing  index  of 
the  course  In  which  new  production  should  be  di- 
rected." Through  the  mechanism  of  the  Stock  Ex- 
change, therefore,  the  public  determines  the  direc- 
tion in  which  new  capital  shall  be  applied  to  new 
undertakings.  In  this  way  our  great  railways  were 
built,  our  Western  country  opened  to  progress,  and 
our  vast  Industrial  undertakings  made  possible. 

"The  stock  market  acts  as  a  reservoir  and  distributor  of 
capital,  with  something  of  the  same  efficiency  with  which 
a  series  of  well-regulated  locks  and  dams  operates  to  equalize 


28    THE  STOCK  EXCHANGE  FROM  WITHIN 

the  irregular  current  of  a  river.  The  hand  of  man  is  being 
stretched  out  in  the  valley  of  the  Nile  to  build  great  storage 
basins  and  locks,  and  the  waters  which  flow  down  the  grea-. 
river  may  be  husbanded  until  they  are  needed,  when  they 
are  released  in  small  but  sufficient  quantities  to  fertilize 
the  country  and  tide  over  the  periods  of  drought.  Something 
of  the  same  service  is  performed  for  accumulation  of  capital 
by  the  delicate  series  of  reservoirs,  sluice  gates,  and  locks 
provided  by  the  mechanism  of  the  stock  market.  The  rate 
of  interest  measures  the  rise  and  fall  of  the  supply  of  capital, 
as  the  locks  determine  the  ebb  and  flow  of  the  life-giving 
water.  The  existence  of  negotiable  securities  is  in  the 
nature  of  a  great  reservoir,  obviating  the  disastrous  effects 
of  demands  which  might  drain  away  the  supply  of  actual 
coin,  and  preventing  the  panic  and  disaster,  which,  without 
such  a  safeguard,  would  frequently  occur  in  the  market 
for  capital."* 

Some  day,  no  doubt,  the  United  States  will  be- 
come a  great  creditor  nation,  as  England  is,  and 
then  the  field  of  these  operations  will  be  extended 
to  other  countries.  When  that  time  comes  we 
shall  take  a  hand,  through  the  machinery  of  the 
Stock  Exchange,  in  the  development  of  new  and 
immense  fields  of  human  endeavor  just  as  London 
does  to-day.  To  what  extent  could  capital  ex- 
ports of  such  tremendous  economic  significance 
continue  if  so  useful  and  so  indispensable  an  in- 
stitution as  the  Stock  Exchange  were  abolished  or 
interrupted.^  It  was  Burke  who  said  that  "great 
empires  and  little  minds  go  ill  together,"  and  so 

*  Charles  A.  Conant,  "The  Uses  of  Speculation,"  Forum  (August,  1901). 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    29 

it  is  with  great  markets  and  little  critics.  There 
can  be  no  worthier  purpose  in  the  commercial 
world  than  the  upbuilding  of  a  great  centre  of 
credit  designed  to  finance  material  enterprise, 
enrich  the  world,  and  extend  the  benefits  of  civili- 
zation to  new  lands  and  new  people,  based  upon 
the  credit  supplied  by  the  banker,  the  money  pro- 
vided by  the  speculator  and  investor,  and  the  safe- 
guards afforded  by  the  Stock  Exchange.  And  yet, 
curiously,  the  greater  the  effort  in  these  directions, 
the  greater  the  criticism.  Just  in  proportion  to 
the  perfection  with  which  all  these  agencies  equal- 
ize prices,  economize  time  and  effort,  and  protect 
the  public,  so  they  seem  to  attract  attention, 
comment,  and  attack.* 

In  Wall  Street,  according  to  this  viewpoint, 
everything  is  tainted,  sinister,  reprehensible, 
covetous  and  unscrupulous,  just  as  it  follows  the 
onward  march  of  invention,  science,  and  progress^ 


*Suppose  for  a  moment  that  the  stock  markets  of  the  world  were  closed, 
that  it  was  no  longer  possible  to  learn  what  railways  were  paying  dividends, 
what  their  stocks  were  worth,  how  industrial  enterprises  were  faring  — 
whether  they  were  loaded  up  with  surplus  goods  or  had  orders  ahead. 
Suppose  that  the  information  afforded  by  public  quotations  on  the  stock 
and  produce  exchanges  were  wiped  from  the  slate  of  human  knowledge. 
How  would  the  average  man,  how  even  would  a  man  with  the  intelligence 
and  foresight  of  a  Pierpont  Morgan,  determine  how  new  capital  should 
be  invested?  He  would  have  no  guides  except  the  most  isolated  fact? 
gathered  here  and  there  at  great  trouble  and  expense.  A  greater  misdi- 
rection of  capital  and  energy  would  result  than  has  been  possible  since  the 
organization  of  modern  economic  machinery.  "Wall  Street  and  the 
Country,"  by  Charles  A.  Conant,  pp.  92-93.  —  G.  P.  Putnam's  Sons,  New 
York,  1904. 


30    THE  STOCK  EXCHANGE  FROM  WITHIN 

This  sort  of  criticism  will  not,  of  course,  continue. 
The  man  in  the  street  —  the  average  layman  to 
whom  I  have  ventured  to  address  this  chapter 
will  learn  sooner  or  later  —  in  point  of  fact  he  is 
learning  now  —  that  the  questionable  practices 
in  Wall  Street  which  started  all  this  hubbub,  and 
which  were  a  natural  and  a  human  accompani- 
ment of  the  slowly  developed  technique  of  this  or 
-any  other  business,  have  now  been  effectually 
stopped.  It  has  been  a  very  long  time,  for  ex- 
ample, since  Jay  Gould  ran  his  printing-press  for 
Erie  certificates,  and  that  incident  cannot  possibly 
happen  again.  The  Keene  type  of  manipulator 
has  gone,  never  to  return.  "Corners,"  too,  have 
seen  their  last  day  on  'Change,  and  so  also  have 
other  artificial  impediments  in  the  way  of  natural 
supply  and  demand.  It  has  been  years  since 
the  Cordage  scandal,  and  the  Hocking  Coal 
incident  marked  the  end  of  that  form  of  manipu- 
lation. Yet  there  are  persons  who  talk  of  these 
things  as  though  they  were  daily  occurrences, 
overlooking  the  fact  that  the  New  York  Stock 
Exchange,  by  its  own  efforts  put  a  stop  to  the 
evils  complained  of,  and  will  never  tolerate  their 
return. 

McMaster  in  his  "History  of  the  People  of  the 
United  States"  tells  us  that  in  the  early  days  in 
New  England  public  sentiment  was  so  aroused 


FUNCTIONS  OF  THE  STOCK  EXCHANGE    31 

against  the  legal  profession  that  lawyers  "were 
denounced  as  banditti,  as  blood-suckers,  pick- 
pockets, windbags  and  smooth-tongued  rogues.'* 
At  that  period  in  our  history  feeling  ran  so  high 
against  banks  and  bankers  that  Aaron  Burr  was. 
only  able  to  procure  a  charter  for  the  Manhattan 
(Banking)  Company  by  resorting  to  the  subterfuge 
of  naming  it,  in  the  Act,  *'a  Company  to  furnish 
the  City  with  water."  No  doubt  all  this  rancor 
and  hostility  seemed  a  very  serious  matter  to  the 
lawyers  and  bankers  of  those  days,  just  as  the 
criticism  of  to-day  strikes  home  to  members  and 
friends  of  the  Stock  Exchange. 

The  lawyers  made  many  mistakes  a  century 
and  a  half  ago  when  the  code  and  its  practice  were 
imperfectly  understood  in  this  country;  so  it  was 
with  the  early  history  of  banking;  and  so  in  our 
time  Wall  Street  and  the  Stock  Exchange  have 
made  the  mistakes  which  any  gradually  develop- 
ing form  of  enterprise  must  make.  But  these 
mistakes  are  dead  or  dying,  and,  in  their  place, 
no  doubt,  there  will  come  a  better  understanding 
all  around.  When  that  day  dawns  the  thoughtful 
American  will  realize  that  the  particular  role 
which  the  Stock  Exchange  plays  in  promoting 
all  forms  of  commercial  endeavor  is  a  boon  such 
as  no  country  in  the  history  of  earlier  days  ever 
enjoyed.     He  will  contemplate  his  country's  prog- 


32      THE  STOCK  EXCHANGE  FROM  WITHIN 

ress  with  pride;  he  will  rejoice  in  its  capacity 
to  outstrip  other  countries;  he  will  acclaim  its 
advancement  toward  the  proud  position  now  held 
by  England,  the  banker  and  the  clearing-house  of 
the  world.  And  he  will  learn  —  this  thoughtful 
citizen  —  that  material  achievements  like  these 
cannot  be  attained  without  a  market  for  capital 
and  a  market  for  securities.* 


*  The  student  who  wishes  to  go  more  thoroughly  into  the  subject  of 
Stock  Exchange  usefulness  is  referred  to  "The  Annals  of  the  American 
Academy  of  Political  and  Social  Science,"  Vol.  XXXV,  No.  3,  May,  1910, 
Philadelphia.  "Some  Thoughts  on  Speculation,"  by  Frank  Fayant,  New 
York,  1909;  "The  Stock  Exchange,"  by  Francis  W.  Hirst,  London,  Williams 
&  Norgate,  1911;  "Wall  Street  and  the  Country,"  by  Chas.  A.  Conant, 
New  York,  G.  P.  Putnam's  Sons,  1904;  "Story  of  the  Stock  Exchange," 
by  Chas.  Duguid,  London,  New  York,  E.  P.  Button  &  Co.,  1902;  "The 
Stock  Exchange,  London,"  Methuen  &  Co.,  1904;  "The  New  York  Stock 
Exchange,"  by  Francis  L.  Fames,  New  York,  1894;  "Der  Deutsche  Kapi- 
talmarkt,"  by  Rudolph  Eberstadt,  Leipzig,  Duncker  &  Humbolt,  1901; 
"The  Stock  Exchange,"  (London),  by  C.  D.  Ingall  &  G.  Withers,  Long- 
mans, Green  &  Co.,  1904;  "A  Simple  Purchase  and  Sale  Through  a  Stock- 
broker," by  Eliot  Norton,  Harvard  Lav.  Review,  Vol.  VIII,  No.  8;  "Stock 
Exchange  Investments;  History,  Practice,  and  Results,"  London,  Simpkin, 
Marshall,  Hamilton,  Kent  &  Co.,  1900. 


CHAPTER  II 

THE    USES    AND    ABUSES    OF    SPECULATION 


CHAPTER  II 

THE  USES  AND  ABUSES  OF  SPECULATION 

Somewhere  in  each  one  of  us  lurks  Stevenson's 
spirit  of  ''divine  unrest,"  the  parent  of  specula- 
tion. To-day,  as  in  wise  old  Greece  in  the  morn- 
ing of  the  world,  philosophers  sit  under  every 
tree,  speculating  upon  the  phenomena  of  the 
universe,  and  upon  the  practical  application  of 
them  to  the  needs  of  humanity.  Thus  Archi- 
medes came  to  know  of  things  that  we  now  call 
Copernican,  seventeen  centuries  before  Coper- 
nicus was  born;  thus  Columbus  and  his  argosy 
sailed  into  the  great  unknown,  speculating  upon 
an  irrational  and  even  shocking  exploit;  thus 
Pasteur  saved  to  France  through  the  meditations 
of  his  speculative  mind  a  sum  greater  than  the 
cost  of  the  Prussian  war  and  the  colossal  indem- 
nity that  followed  it. 

And  so  the  "divine  unrest"  goes  on  and  on, 
impelling  men  to  speculations  and  explorations 
of  the  physical  world  and  of  the  world  that 
lies  beyond  our  primitive  senses,  with  here  and 
there   a   high    achievement,    and    now   and   then 

35 


36    THE  STOCK  EXCHANGE  FROM  WITHIN 

a  miserable  failure,  but  always  on  and  on. 
The  hypothesis  of  the  spectacled  professor  blos- 
soms into  a  boon;  the  dream  of  the  inventor  be- 
comes a  benefaction;  the  forlorn  hope  of  the  ex- 
plorer points  the  way  to  wealth.  Things  that  were 
speculations  yesterday  become  realities  to-day. 
To-morrow.^  —  nobody  knows.  In  a  free  field,  not 
bounded  by  formulae  nor  restricted  by  law  of  God 
or  man,  with  money  to  encourage  it  and  enterprise 
to  spur  it  on,  what  may  come  from  the  speculations 
of  the  future  passes  understanding. 

Now  speculation  is  an  all-embracing  word, 
overworked,  threadbare,  and  worn  to  the  bone. 
Originally  it  meant  "to  see";  then  "to  view,'* 
"watch,"  "spy  out";  then  "exploration"  or 
"contemplation."  When  thrift  came  into  the 
language  and  men  ceased  burying  their  gold,  it 
began  to  take  on  a  new  meaning.  The  spirit  of 
legitimate  adventure,  that  entered  men's  minds 
when  the  Most  Christian  Kings  abandoned  brute 
force  and  repudiation,  led  men  to  buy  things  in 
the  hope  of  selling  them  at  a  profit.  It  was  risky 
business  at  first,  and  capital,  then  as  now,  was 
timid.  The  High  Finance  of  the  Middle  Ages 
was  not  easily  forgotten.  But  little  by  little 
channels  through  which  enterprise  might  flow 
into  wealth  came  into  being,  and  confidence  came 
with  them.     This  was  called  speculation. 


SPECULATION  37 

By  the  time  Adam  Smith  wrote  his  "Wealth  of 
Nations"  (1776)  the  word  was  firmly  fixed  in  the 
language.  "The  establishment  of  any  new  manu- 
facture," he  said,  "or  any  new  branch  of  com- 
merce, or  of  any  new  practice  in  agriculture,  is 
always  a  speculation  from  which  the  projector 
promises  himself  extraordinary  profits."  How 
the  early  channels  of  speculation  broadened  into 
great  rivers,  how  confidence  grew  as  the  art  of 
making  money  and  increasing  it  developed,  how 
credit  became  established,  how  speculation  led 
to  the  opening  of  new  countries  and  the  extension 
of  immense  advantages,  through  civilization,  to 
the  people  of  those  countries  —  all  this  is  a  fas- 
cinating story.  And  yet  the  speculation  of  to-day 
is  no  different  in  its  elementals  from  that  of  the 
early  Greeks;  the  same  spirit  of  "divine  unrest" 
that  spurs  on  the  philosopher  in  his  study  stimu- 
lates the  explorer  of  strange  lands,  beckons  on 
the  engineer  and  the  builder  of  railways,  and 
attracts  the  capital  of  the  adventurous  investor. 
We  cannot  stop  it  if  we  would,  because  hope, 
ambition,  and  avarice  are  fundamentals  of  human 
nature.  The  police  cannot  arrest  them;  they 
are  fixed  and  immutable. 

If  there  is  more  speculation  in  material  things 
to-day  than  there  ever  was  before,  it  is  because 
there  are  more  things  to  speculate  in,  more  money 


S8    THE  STOCK  EXCHANGE  FROM  WITHIN 

to  speculate  with,  more  people  to  speculate,  and 
more  machinery,  like  telephones  and  telegraphs, 
to  facilitate  speculation.  Capital,  credit,  and 
new  undertakings  grow  day  by  day  and  open  new 
avenues  of  possible  profit.  The  per  capita  wealth 
of  nations,  growing  by  what  it  feeds  on,  constantly 
seeks  new  fields  for  enterprise  and  adventure. 
The  intelligence  of  the  people  increases  by  leaps 
and  bounds,  and  goes  peering  curiously  into  all  the 
little  nooks  and  crannies  of  the  world  for  oppor- 
tunities of  gain  —  the  apotheosis  of  speculative 
enterprise. 

All  forms  of  human  endeavor  in  material 
things  are,  or  were  at  their  beginning,  specula- 
tions. Every  ship  that  goes  to  sea  carries  with 
it  a  speculation,  and  leaves  another  one  behind 
it  at  Lloyds.  Every  man  who  insures  his  life 
or  his  house  buys  a  speculation,  and  every  com- 
pany that  insures  him  sells  one.  The  farmer 
speculates  when  he  fertilizes  his  land,  again  when 
he  plants  his  seed,  and  again  when  he  sells  his  crop 
for  future  delivery,  as  he  often  does,  before  it  is 
planted  or  before  it  has  matured.  The  merchant 
contracts  to  fill  his  shelves  long  before  spring 
arrives;  he  is  speculating.  The  manufacturer 
sells  to  him,  speculating  on  the  hope  or  belief  that 
he  will  be  able  to  buy  the  necessary  raw  material, 
and  again  on  the  labor,  the  looms  and  the  spindles 


SPECULATION  39 

necessary  to  make  the  delivery.  In  the  South 
the  grower  of  cotton  and  in  AustraHa  the  grower 
of  wool  are  likewise  speculating  on  the  probability 
of  a  crop  and  on  the  price  at  which  they  may  sell 
to  this  manufacturer.  It  sounds  like  "this  is 
the  house  that  Jack  built"  in  its  endless  chain 
of  sequences;  a  chain,  indeed,  and  one  no  stronger 
than  its  weakest  link.  Interfere  with  any  part 
of  it,  and  the  whole  commercial  structure  which 
it  binds  together  falls  apart.  The  grower,  the 
manufacturer,  and  the  merchant  must  speculate. 

There  was  twofold  speculation  on  the  part  of 
our  great  financial  barons  who  built  our  trans- 
continental railways,  for  they  had  to  reckon  not 
only  upon  the  probability  of  profit  in  their  under- 
takings but  likewise  upon  the  willingness  of  other 
speculators  —  you  and  I  —  to  assist  them  by  buy- 
ing a  part  of  the  securities  which  represented  the 
outlay.  To  be  sure  it  so  happened  that  many  of 
these  vast  speculations  at  first  proved  unsound. 
Some  of  them  were  a  little  premature;  others 
pushed  too  far;  they  brought  disaster  upon  the 
speculators  who  had  put  money  into  them.  And 
yet  who  shall  say  that  our  great  railways  have 
failed  to  enrich  the  world  and  spread  the  comforts 
of  civilization.^  *'But  for  a  verdant  and  ever- 
green faith,"  says  a  recent  writer,  "salted  with 
the    love   of   risk    and    adventure    for   their  own 


40    THE  STOCK  EXCHANGE  FROM  WITHIN 

sakes,  how  could  mountains  be  bored  and  waters 
bridged  ?  If  there  were  not  superstition  there  could 
be  no  religion;  if  there  were  not  bad  speculation 
there  could  be  no  good  investment;  if  there  were 
no  wild  ventures  there  would  be  no  brilliantly 
successful  enterprises." 

This  is  not  hyperbole;  it  is  fact.  The  world 
of  business  and  enterprise  must  go  on;  it  cannot 
stop.  As  it  goes  on  capital  must  be  enlisted, 
which  is  another  way  of  saying  that  speculators 
must  be  attracted.  The  only  way  that  has  been 
devised  to  attract  them  is  through  the  medium 
of  certificates  of  ownership  or  evidences  of  debt, 
called  securities.  But  the  business  does  not  end 
there,  for,  as  we  have  seen  in  the  previous  chapter, 
the  capital  of  speculators  will  not  take  hold  unless 
a  market  is  provided.  They  want  to  know  where 
they  stand;  before  they  venture  upon  the  troubled 
waters  of  new  enterprises  they  must  be  assured 
of  a  public  market,  a  harbor  where  they  can  get 
ashore  quickly  if  storms  are  brewing. 

The  only  plan  that  the  ingenuity  of  man  has 
thus  far  devised  to  meet  this  emergency  is  a 
Stock  Exchange.  One  man,  or  two,  or  a  hundred 
cannot  make  a  market,  because  the  immense 
volume  and  variety  of  these  securities  make  it 
impossible  for  any  unorganized  handful  of  brokers 
and    dealers    to   determine   a    fair   market   price. 


SPECULATION  41 

What  is  required,  and  what  the  man  whose  capital 
is  wanted  insists  upon,  is  an  organized  body  of 
brokers,  speculators,  and  investors  competing 
keenly,  seeking  to  buy  cheap  and  sell  dear,  gather- 
ing and  disseminating  all  the  news,  and  so  sharpen- 
ing the  judgment  and  stimulating  the  higgling 
of  buyers  and  sellers  as  to  bring  prices  to  their 
legitimate  level  and  give  them  stability.  Ten 
thousand  competitors  in  this  business  of  bringing 
prices  and  values  together  are  of  course  better 
than  one  thousand;  a  hundred  thousand  would 
be  better  still.  The  Stock  Exchange  supplies  this 
want,  and  will  continue  to  supply  it  until  a  better 
plan  is  devised.*  Meantime,  since  it  has  grown 
to  its  present  stature  by  forms  of  speculation 
necessary  to  the  maintenance  of  enterprise,  any 
serious  interruption  of  the  facilities  it  affords  will 
bring  enterprise  to  a  standstill  and  cause  the  whole 
sensitive  structure  of  credit  to  collapse  in  terror. 
Let  Professor  Seligman  explain  this  matter: 

"If  a  raihvay  or  other  industry,  in  launching  a  new  enter- 
prise, had  to  depend  on  the  chance  investors  at  the  time  of 

*  The  Stock  Exchange  is  an  organization  of  individuals  formed  for  the 
purpose  of  listing  securities  and  for  facilitating  the  sale  and  delivery  of 
stocks.  .  .  .  Through  its  agency  corporations  are  enabled  to  sell  their 
shares  and  get  the  money  capital  to  conduct  their  business.  The  Stock 
Exchange  has  come  into  existence  because  of  a  demand  for  trade  facilities 
that  will  adjust  differences  of  opinion  in  reference  to  future  values  of  corpora- 
tion securities  and  give  the  purchaser  some  idea  of  values.  ("Modern 
Industrialism,"  by  Frank  L.  McVey,  Professor  of  Political  Economy  in  the 
University  of  Minnesota.    N.  Y.,  1904.) 


42    THE  STOCK  EXCHANGE  FROM  WITHIN 

the  issue  of  the  securities,  it  would  be  seriously  hampered. 
The  mere  knowledge  that  at  any  moment  there  will  be  a 
ready  sale  on  the  Exchange  greatly  increases  the  circle 
of  purchasers,  many  of  whom  may  not  intend  to  be  perma- 
nent investors.  The  Stock  Exchange  aids  the  investment 
of  capital,  as  the  Produce  Exchange  aids  the  production  of 
finished  commodities.  Business  orders  and  corporate  needs 
are  intermittent,  because  they  depend  on  temporary  exigen- 
cies; the  risks  at  one  end,  at  all  events,  are  eliminated  by 
the  unintermittent,  continuous  market  which  regular  specu- 
lation affords.  The  Cotton  Exchange  was  the  result  of  the 
disorganization  of  the  cotton  trade  after  the  Civil  War; 
speculation  in  all  other  staples  has  in  the  same  way  been  the 
consequence  of  the  efforts  of  the  manufacturer  to  avert 
the  risks  of  intermittent  and  spasmodic  fluctuations  in  the 
raw  material.  The  result  of  regular  speculation  is  to  steady 
prices.  Speculation  tends  to  equalize  demand  and  supply, 
and  by  concentrating  in  the  present  the  influences  of  the 
future  it  intensifies  the  normal  factors  and  minimizes  the 
market  fluctuation.  Speculation  so  far  as  it  has  become  the 
regular  occupation  of  a  class,  differentiated  from  other 
business  men  for  this  particular  purpose,  subserves  a  useful 
and  in  modern  times  an  indispensable  function."* 

Here  w^e  have  an  authority  who  tells  us  that 
speculation  in  securities,  no  less  than  in  raw 
materials,  is  "an  indispensable  function"  if  busi- 
ness is  to  go  ahead.  The  last  census  shows  that 
32^  per  cent,  of  the  population  of  the  United 
States  is  composed  of  laboring  men,  not  counting 
agricultural  workers.     This  large  army  of  men  is 


•"Principles  of  Economics,"  by  Edwin  R.  A.  Seligman,  Professor  of 
Political  Economy  in  Columbia  University  (N.  Y.,  1905). 


SPECULATION  43 

by  no  means  independent;  on  the  contrary  it  is 
strictly  dependent  on  the  ability  of  others  to 
give  it  employment.  Shut  down  the  factories, 
curtail  the  operations  of  railways,  close  the 
mines  and  quarries,  stop  building  and  new  con- 
struction, and  in  greater  or  less  degree  suffering 
and  privation  among  these  large  masses  must 
ensue. 

Now  go  a  step  further,  and  we  find  that  the 
managers  of  these  railways,  mines,  and  factories, 
are  in  turn  dependent  —  wholly  dependent  upon 
capital.  They  cannot  go  ahead  with  the  exten- 
sions and  improvements  necessary  to  efficiency 
without  borrowing  money;  and  credit,  in  turn, 
will  not  come  to  their  support  unless  a  broad  mar- 
ket is  provided,  through  the  Stock  Exchange,  for 
the  securities  which  represent  these  obligations. 
Hence  we  see  that  just  as  every  farmer  in  the  West 
and  every  cotton-grower  in  the  South  must  have 
a  stable  market  for  his  products,  so  every  laborer 
in  our  great  industrial  field  is  directly  concerned 
with  the  maintenance  of  a  stable  market  for  the 
securities  of  the  company  that  employs  him. 
The  Interests  of  one  are  the  interests  of  all, 
and  speculation,  in  one  form  or  another,  under- 
lies all  industrial  progress.  ''Complaint  is  made 
of  the  evils  of  speculation,"  said  the  greatest 
of  French  economists,   ^^but  the  evils  that  specu- 


44    THE  STOCK  EXCHANGE  FROM  WITHIN 

lation  prevents  are  much  greater  than  those  it 
causes.^'* 

Now  that  we  have  reached  a  point  in  our 
discussion  that  brings  us  face  to  face  with  the 
so-called  "evils"  of  speculation  on  the  Stock  Ex- 
change, let  us  pause  and  consider  the  difference 
between  speculation,  which  is  held  by  many  to 
be  abhorrent,  and  investment,  which  is  generally 
thought  right  and  proper.  The  first  thing  we 
encounter  is  the  shadowy  and  indistinct  boundary 
line  that  separates  the  one  from  the  other.  Does 
any  one  know  where  the  one  begins  and  the  other 
ends?  France  has  more  conservative  investors 
than  any  other  country,  yet,  as  Mr.  Hirst  puts  it, 
the  most  critical  and  hidebound  buyer  of  French 
rentes  is  a  speculator  in  the  sense  that  he  not  only 
wishes  his  purchase  to  yield  him  interest,  but  also 
hopes  and  expects  that  sooner  or  later  he  will  be 
able  to  sell  out  at  a  profit,  all  of  which  is  legitimate, 
proper,  and  human.  The  first  question  every  man 
asks  when  the  time  comes  to  invest  is,  "Is  this  a 
good  time  for  investment.'"'  "Am  I  buying 
cheap.?"  by  which  he  means  "Are  these  invest- 
ments likely  to  enhance  in  value?" 

He  may  have  bought  Spanish  bonds  at  low 
prices    during   the   war   between    Spain    and    the 


*  "Nouveau  Dictionnaire  d'Economie  Politique,"  by  Paul  Leroy-Beaulieu, 
Paris,  1892. 


SPECULATION  45 

United  States  —  a  somewhat  speculative  invest- 
ment —  and  in  his  purchase  he  beHeved  himself 
an  investor  in  a  strict  sense.  Yet,  when  those 
bonds  recovered  to  a  normal  basis  and  he  sold  out 
at  a  profit,  was  it  speculation,  or  investment,  or 
a  little  of  both,  that  defined  the  trade?  British 
consols  are  low  to-day,  and  there  is  of  course  no 
safer  investment,  but  the  investor  who  buys  them 
is  influenced  by  the  fact  that  a  long  period  of 
peace  seems  to  lie  ahead,  with  reduced  expendi- 
tures for  armament  and  hence  with  diminished 
borrowings  by  the  Government  leading  to  a 
substantial  recovery  in  the  price  of  these  solid 
securities.  Such  a  man  is  "speculating"  on 
England's  abstention  from  war,  on  its  limitation 
of  military  and  naval  expenditures,  and  on  the 
probable  effects  of  these  matters  on  the  price  of 
his  consols.* 

The  truth  seems  to  be  that  all  investment  is 
speculation,  differing  from  it  in  degree  but  not 
in  kind.  This  salient  fact  was  recognized  as  long 
ago  as  1825,  when,  despite  the  comparatively 
limited  field  for  investment  enterprise,  A-lcCulloch 
saw  what  was  coming  and  grasped  the  true  idea 
of  the  part  speculation  and  its  handmaiden, 
investment,  were  to  play  in  the  industrial  renais- 


*  Consult  "The  (London)  Stock  Exchange,"  Francis  W.  Hirst,  London, 
Chap.  VI,  p.  164,  Williams  &  Norgate,  191 1. 


46    THE  STOCK  EXCHANGE  FROM  WITHIN 

sance.  Coming  at  a  time  when  speculation  was 
new,  and  subjected,  as  all  innovations  are,  to 
widespread  criticism  and  doubt,  his  words  have 
prophetic  significance. 

"It  is  obvious  that  those  who  indiscriminately 
condemn  all  sorts  of  speculative  engagements 
have  never  reflected  on  the  circumstances  incident 
to  the  prosecution  of  every  undertaking.  In  truth 
and  reality  they  are  all  speculations.  Their 
undertakers  must  look  forward  to  periods  more 
or  less  distant,  and  their  success  depends  entirely 
on  the  sagacity  with  which  they  have  estimated 
the  probability  of  certain  events  occurring,  and 
the  influence  which  they  have  ascribed  to  them. 
Speculation  is,  therefore,  really  only  another  name 
for  foresight;  and,  though  fortunes  have  sometimes 
been  made  by  a  lucky  hit,  the  character  of  a 
successful  speculator  is,  in  the  vast  majority  of 
instances,  due  to  him  also  who  has  skilfully 
devised  the  means  of  effecting  the  end  he  had  in 
view,  and  who  has  outstripped  his  competitors 
in  the  judgment  with  which  he  has  looked  Into 
futurity,  and  appreciated  the  operation  of  causes 
producing  distant  effects.  "* 

A  quarter  of  a  century  later  we  find  England's 
foremost  thinker  sounding  the  same  clear  note. 
John  Stuart  Mill  was  by  no  means  a  hermit  phil- 

*  "Principles  of  Economics,"  by  J.  R.  McCuUoch,  London,  1825. 


SPECULATION  47 

osopher  feeding  on  theories.  Traveler,  sports- 
man, business  man,  statesman,  and  author,  he 
saw  things  broadly  and  wrote  for  practical 
men.  "Speculators,"  he  said  —  and  he  was 
speaking  of  the  "greedy"  ones  who  buy  and  sell 
for  gain  —  "have  a  highly  useful  office  in  the 
economy  of  society.  Among  persons  who  have 
not  much  considered  the  subject  there  Is  a  notion 
that  the  gains  of  speculators  are  often  made  by 
causing  an  artificial  scarcity;  that  they  create  a 
high  price  by  their  own  purchases  and  then  profit 
by  it.  This  may  easily  be  shown  to  be  fallacious." 
He  then  shows,  what  I  have  outlined  elsewhere, 
that  the  market  Is  larger  than  any  speculator  or 
group  of  speculators,  and,  if  this  was  true  In  1848, 
I  think  It  will  not  be  disputed  that  it  Is  quite  true 
to-day. 

Continuing,  Mill  says:  "The  operations  of 
speculative  dealers  are  useful  to  the  public  when- 
ever profitable  to  themselves.  The  Interest  of 
the  speculators  as  a  body  coincide  with  the  inter- 
ests of  the  public;  and  as  they  can  only  fail  to 
serve  the  public  Interest  in  proportion  as  they 
miss  their  own,  the  best  way  to  promote  the  one  is  to 
leave  them  to  pursue  the  other  in  perfect  freedom. 
Neither  law  nor  opinion  should  prevent  an  operation, 
beneficial  to  the  public,  from  being  attended  with  as 
much  private  advantage  as  is  compatible  with  full 


48     THE  STOCK  EXCHANGE  FROM  WITHIN 

and  free  competition.''^  Mill  makes  no  distinction 
here  between  investors  and  speculators;  they  are 
one  and  the  same.  In  any  case  it  is  conceded 
that  speculation  is  what  makes  the  markets 
to-day,  since  90  per  cent,  of  the  transactions  that 
take  place  daily  on  the  world's  Stock  Exchanges 
are  speculations  pure  and  simple.  And  this  is  a 
good  thing.  Before  we  go  on  with  our  subject, 
let  Professor  Emery  explain  why,  and  bring  the 
teachings  of  McCuIloch  and  Mill  down  to  our 
own  day: 

"Speculation  has  become  an  increasingly  important  factor 
in  the  economic  world  without  receiving  a  corresponding 
place  in  economic  science.  In  the  field  in  which  it  acts,  in 
the  trade  in  grain  and  cotton  and  securities  and  the  like, 
speculation  is  the  predominant  influence  in  determining 
price,  and,  as  such,  is  one  of  the  chief  directive  forces  in  trade 
and  industry.  But  treatises  in  the  English  language  on 
general  economic  theory  and  conditions  have  given  very 
little  space  to  this  influence,  which  is  fundamental  in  the 
world  of  economic  fact.     .     .     . 

"It  is  true  that  forty  years  ago  speculation  was  far  less 
important  than  it  is  now,  and  there  was,  therefore,  more 
justification  for  disregarding  it.  Professor  Hadley  has  given 
due  consideration  to  the  new  conditions  which  prevail  in 
modern  business.  At  the  same  time  it  should  be  remembered 
that  McCulloch,  already  in  his  day,  had  grasped  the  true 
idea  of  the  function  of  speculation,  a  fact  shown  by  the 
incorporation  of  his  treatment  of  the  subject  into  his  chapters 
on  Value.  Wide  as  is  the  influence  of  speculation,  its  force 
is  felt  primarily  in  the  field  of  prices.  By  making  prices  it 
directs  industry  and  trade,  for  men  produce  and  exchange 


SPECULATION  49 

according  to  comparative  prices.     Speculation  then  is  vitally 
connected  with  the  theory  of  value. 

"  From  the  point  of  view  of  theory,  therefore,  it  is  incorrect 
to  attach  so  little  importance  to  the  function  of  speculation; 
in  practice  it  is  impossible  to  deal  intelligently  with  the  evils 
of  the  speculative  system  without  first  recognizing  its  real 
relation  to  business.  Both  the  writer  and  the  reformer  must 
reckon  more  than  they  have  yet  done  with  the  fact  that  specu- 
lation in  the  last  half  century  has  developed  as  a  natural 
economic  institution  in  response  to  the  new  conditions  of 
industry  and  commerce.  It  is  the  result  of  steam  transpor- 
tation and  the  telegraph  on  the  one  hand,  and  of  vast  indus- 
trial undertakings  on  the  other.  The  attitude  of  those  who 
would  try  to  crush  it  out  by  legislation,  without  disturbing 
.any  other  economic  conditions,  is  entirely  unreasonable."* 

Now  we  come  to  the  evils  of  the  business.  That 
there  are  evils,  really  serious  ones,  no  one  will  deny. 
To  be  sure  many  of  the  phases  of  speculation  that 
are  called  evils  are  not  evils  at  all;  the  statements 
made  concerning  them  have  what  Oscar  Wilde 
termed  "all  the  vitality  of  error,  and  all  the  tedi- 
ousness  of  an  old  friend,"  and  yet,  although  the 
prevalent  criticism  is  often  stupid  and  superficial, 
there  are  undeniably  offensive  forms  of  specu- 
lation that  one  would  like  to  see  suppressed. 
Speculation  is  a  comparatively  new  phenomenon, 
and  it  has  brought  with  it  dangers  and  pitfalls. 
So  also  have  automobiles,  electricity,  and  steam 


*  "Speculation  on  the  Stock  and  Produce  Exchanges  of  the  United 
States,"  by  Henry  Crosby  Emery,  Professor  of  Political  Economy  at 
Yale  University.     New  York,  1896. 


50     THE  STOCK  EXCHANGE  FROM  WITHIN 

engines.  But  while  the  Stock  Exchange  has 
created  the  arena  for  the  display  of  these  abuses, 
It  has  not  originated  them  "except,"  as  a  recent 
writer  puts  It,  "In  the  sense  In  which  one  may  say 
that  private  property  has  originated  robbery." 

The  great  evil  of  speculation  consists  In  the 
buying  of  securities  or  real  estate  or  anything  else 
with  borrowed  money,  by  uninformed  people  who 
cannot  afford  to  lose.  Its  commonest  form  In 
speculation  In  securities  Is  what  is  known  as 
"margin"  trading,  this  name  being  derived  from 
the  fact  that  the  buyer.  Instead  of  paying  cash  in 
full  for  his  purchase,  deposits  only  a  fractional 
amount  of  its  cost,  which  is  intended  to  serve  as 
a  margin  to  protect  the  broker  from  loss,  while 
the  broker  pays  the  remaining  sum  necessary  to 
complete  the  actual  purchase.  Thus  the  specu- 
lator may  deposit  $looo  on  securities  costing 
$io,cxx),  while  the  broker  furnishes  the  additional 
^9000.  It  is  a  system  in  use  everywhere;  on  the 
London  Stock  Exchange  it  is  called  "Cover,"  on 
the  Paris  Bourse,  "La  Couverture." 

There  Is  no  fixed  amount  of  margin  called  for 
by  brokers,  as  circumstances  differ  widely  with 
the  character  of  the  securities  dealt  In,  the  stand- 
ing of  the  buyer,  and  the  condition  of  the  market; 
but  In  a  broad  way  it  may  be  said  that  members 
of  the  New  York  Stock  Exchange  exact  a  margin 


SPECULATION  51 

equivalent  to  ten  points  on  middle-grade  specu- 
lative issues,  twenty  points  on  high-priced  and 
erratic  securities,  and  five  points  -oil  very  low- 
priced  shares  that  move  slowly.  There  are,  of 
course,  certain  securities  on  which  no  payment 
short  of  actual  outright  purchase  in  full  would  be 
accepted  by  reputable  brokers,  while  on  the  other 
hand,  in  the  case  of  securities  that  fluctuate  but 
slightly,  such  as  our  government,  state,  or  munici- 
pal bonds,  a  5  per  cent,  margin  would  be  ample. 
This  is  also  the  practice  in  London  and  Paris, 
generally  speaking.  In  Paris  the  Agents  de 
Change  always  insist  upon  a  greater  margin  than 
the  Coulissiers,  or  outside  brokers,  and  here  mem- 
bers of  the  New  York  Stock  Exchange  invariably 
pursue  the  same  policy. 

This  affords  an  opportunity  to  say  that  the  local 
evil  of  stock  speculation  arising  from  insufficient 
margins  is  one  that  may  be  laid  at  the  door  of  out- 
side Exchanges  rather  than  the" Big"  Exchange,  as 
it  is  called,  because,  in  the  minor  Exchanges,  mar- 
gins are  notoriously  small,  and  the  smaller  the  mar- 
gin the  greater  the  number  of  "victims."  Indeed, 
if  it  were  not  for  this  practice  it  would  be  difficult 
for  members  of  smaller  Exchanges  to  exist  at  all. 
In  so  far  as  speculation  in  securities  may  merit 
criticism,  this  tendency  to  attract  poor  people 
by  the  bait  of  slim  margins  is  undeniably  a  very 


52     THE  STOCK  EXCHANGE  FROM  WITHIN 

real  evil,  and  one  which  can  only  be  corrected  b}^ 
the  brokers  themselves.  The  Hughes  Committee, 
after  devoting  much  time  and  labor  to  this  matter, 
put  its  conclusions  in  these  words: 

"We  urge  upon  all  brokers  to  discourage  specu- 
lation upon  small  margins,  and  upon  the  Exchange 
to  use  its  influence,  and  if  necessary  its  power, 
to  prevent  members  from  soliciting  and  generally 
accepting  business  on  a  less  margin  than  20  per 
cent."* 

Every  one  connected  with  the  New  York 
Stock  Exchange  knows  that  this  suggestion,  like 
all  the  others  made  by  the  Commission,  was 
received  with  approval  by  all  hands,  and,  if  a  hard 

*  In  its  effort  to  study  all  possible  remedial  methods  affecting  speculation 
on  margins,  the  Hughes  Commissioners  in  1909  put  this  question  to  the 
Governors  of  the  Stock  Exchange: 

"  Would  taxation  of  loans  made  on  margin  transactiojis  tend  to  discourage 
margin  speculation?  If  so,  would  it  he  desirable  to  graduate  the  tax  in  accord- 
ance with  the  margin  ratio?" 

To  which  the  Governors  replied: 

"In  our  opinion  the  taxation  of  loans  could  not  be  made  upon  margin 
transactions,  as  the  lender  of  the  money  would  be  absolutely  ignorant 
as  to  whether  the  securities  pledged  with  him  were  carried  on  margin  or 
whether  they  were  owned  absolutely.  Any  species  of  taxation  upon  loans 
would  work  a  great  injury  to  the  money  prosperity  of  the  banking  institu- 
tions of  the  City  of  New  York.  Loans  are  made  to  individuals  and  insti- 
tutions upon  bona  fide  property;  they  are  also  made  to  borrowers  of  money 
upon  stocks  and  bonds  offered  to  the  institution,  which  are  marginal  in 
their  nature;  further,  they  are  made  upon  securities  only  in  part  marginal, 
and  any  effort  to  distinguish  would  be  practically  impossible  and  would 
tetard  the  entire  business  of  the  community.  The  effect  of  taxation  upon 
loans  would  be  to  drive  capital  instantly  from  the  city,  and  would  force 
a  species  of  financial  institution  to  arise  in  every  State  which  would  profit 
by  our  inquisitorial  laws,  should  such  be  enacted,  to  their  own  advantage 
and  to  our  serious  detriment.  Such  a  restriction  upon  the  free  lending  of 
money  is  not  only  unsound,  impossible  of  enforcement,  but  could  not 
help  resulting  in  a  constant  evasion  of  the  law." 


SPECULATION  53 

and  fast  rule  could  have  been  devised  to  meet 
not  merely  the  spirit  but  the  letter  of  the  recom- 
mendation, the  Governors  of  the  Exchange  would 
have  put  it  into  instant  operation.  But  there  are 
difficulties  in  the  way,  and  one  of  the  duties  of 
the  Governors  is  to  consider  very  carefully  all 
sides  of  each  perplexing  question  that  comes 
before  them,  not  merely  in  the  interests  of  the 
Stock  Exchange,  but  with  due  regard  to  the 
common  law  and  the  interests  of  the  public. 
Margin  trading  Is  a  matter  of  contract,  and  *'the 
right  of  one  private  person  to  extend  credit  to 
another,"  as  the  Chairman  of  the  Hughes  Com- 
mission himself  points  out,  "is  simply  the  right  to 
make  a  contract,  which,  under  the  Federal  Con- 
stitution, cannot  be  impaired  by  any  State 
Legislature."* 

Here  Is  a  very  considerable  difficulty  in  the  way 
of  restricting  margin  trading,  and  one  that  is  not 
fully  understood  by  the  outsider.  He  Is  prone 
to  speak  of  contracts  thus  made  as  "gambling 
transactions,"  missing  altogether  the  essential 
point  that  there  Is  a  vast  difference  between  a 
transaction  with  a  contract  behind  It,  enforceable 
at  law,  and  one  that  has  to  do  with  bucket-shops 
and  roulette,  in  which  there  Is  no  contract,  and  Is 


*  "The  Hughes  Investigation,"  by  Horace  White,  Journal  of  Political 
Economy,  October,  1909,  p.  537. 


54    THE  STOCK  EXCHANGE  FROM  WITHIN 

expressly  prohibited  by  law.  No  matter  what  his 
intent  may  have  been  when  he  bought,  and  no 
matter  what  margin  the  broker  accepted  —  the 
buyer  has  the  right  to  demand  his  securities  at 
any  time,  and  the  broker  must  always  be  prepared 
to  deliver  them;  conversely,  the  broker  may 
compel  the  buyer  to  pay  for  and  to  receive  the 
securities  he  has  bought.  Motives  and  methods 
have  nothing  whatever  to  do  with  the  transaction. 
The  broker  who  buys  for  a  client  to-day  does 
not  know,  and  sometimes  the  client  himself  does 
not  know,  whether  the  securities  are  "bought  to 
keep,"  or  are  to  be  sold  to-morrow;  similarly  the 
broker  has  no  means  of  knowing  whether  the 
client,  who  deposited  a  ten-point  margin  at  the 
time  of  his  purchase,  will  or  will  not  deposit 
another  ten  points  to-morrow,  and  continue  such 
payments  until  his  securities  are  wholly  paid  for. 
In  the  large  majority  of  cases  the  intent  of  the 
speculative  buyer  is  to  sell  as  soon  as  he  can  get 
a  satisfactory  profit,  but  that  does  not  make  him 
a  gambler  by  any  means.  Why,^  Because,  if 
he  bets  $1000  on  a  horse  race,  one  party  to  the 
transaction  wins  and  the  other  loses;  whereas,  if 
he  deposits  $1000  as  margin  against  a  stock 
speculation  and  makes  a  profit  of  say  ^500,  the 
broker  loses  nothing  by  paying  him  that  profit 
when  the  account  is  closed.     No  property  changes 


SPECULATION  55 

hands  in  the  one  case,  while,  in  the  other,  actual 
property  is  purchased  and  held  ready  for  delivery 
on  demand.  The  law  is  clear  in  classifying  the 
operations  of  bucket-shops  with  gambling  trans- 
actions, because  in  a  large  majority  of  instances 
no  actual  purchase  is  made;  the  "buyer"  merely 
bets  in  that  case  as  to  what  subsequent  quotations 
will  be;  the  "trade"  is  between  two  principals, 
one  of  whom  must  lose  if  the  other  wins. 

The  Hughes  Commission,  as  I  have  said,  went 
very  fully  into  all  these  matters.  It  was  in  session 
six  months,  and  many  witnesses  were  examined. 
After  considering  all  the  pros  and  cons  of  margin 
trading,  the  experience  of  England  and  Germany 
in  dealing  with  speculation,  the  three-years' 
debate  in  Congress  on  the  Hatch  Anti-Option 
Bill,  and  the  voluminous  reports  of  the  Industrial 
Commission,  the  conclusion  was  reached  "to  urge 
upon  all  brokers,"  as  shown  in  the  paragraph 
cited,  a  general  agreement  on  margins  of  not  less 
than  20  per  cent.  It  must  be  borne  in  mind  that 
this  was  not  in  the  nature  of  a  formal  recommenda- 
tion, but  rather  as  the  expression  of  a  hope  that 
some  measure  of  reform  might  be  accomplished 
if  such  concerted  action  by  brokers  were  feasi- 
ble. 

That  members  of  the  New  York  Stock  Ex- 
change endorse    this   view  goes    without    saying. 


56    THE  STOCK  EXCHANGE  FROM  WITHIN 

They  realize  more  fully  than  is  generally  known 
by  the  public  that  indiscriminate  and  reckless 
speculation  by  uninformed  people  who  are  be- 
guiled into  it  by  the  lure  of  small  margins  is 
an  undoubted  evil  that  should  be  checked, 
and  they  are  doing  what  they  can  to  check 
it  by  discouraging  such  operations.  For  ex- 
ample, it  would  be  very  difficult  to-day  for  a 
woman  to  open  a  speculative  account  with 
any  reputable  firm  of  brokers  on  the  major 
exchange  unless  she  were  well  known,  peculiarly 
qualified  for  such  transactions,  and  abundantly 
able  to  support  them.  Accounts  will  not  be 
accepted  from  clerks  or  employees  of  other 
brokerage  houses  or  of  banks  and  other  corpora- 
tions in  the  Wall  Street  district;  indeed,  such 
transactions  are  expressly  forbidden  by  the  rules 
of  the  Exchange.  No  accounts  will  be  accepted 
from  any  one  who  is  not  personally  known  to  one 
of  the  firm's  partners  —  and  the  practice  resorted 
to  in  earlier  years  of  employing  agents  to  solicit 
business  under  the  nominal  title  of  "office  man- 
agers," "bond  department  managers,"  and  all 
that  sort  of  technical  subterfuge,  is  likewise  for- 
bidden. 

Members  of  the  Exchange  are  not  permitted 
to  advertise  in  any  way  save  that  defined  as  of 
"a    strictly   legitimate   business   character,"    and 


SPECULATION  57 

the  governors  are  the  judges  of  what  is  legiti- 
mate. The  layman  has  but  to  glance  at  the  bare 
and  colorless  announcements  made  by  Stock 
Exchange  houses  in  the  advertising  columns  of 
our  newspapers  to  see  how  rigidly  this  rule  is 
enforced;  indeed  90  per  cent,  of  the  members  do 
not  advertise  at  all.  Best  of  all,  speculation 
on  "shoe-string"  margins  is  now  almost  eliminated 
from  the  major  exchange.  '  The  houses  that 
notoriously  offended  in  this  respect  ten  and 
fifteen  years  ago  are  to-day  inconspicuous  in  the 
day's  dealings.  Their  business  is  gone  —  in  its 
very  nature  it  could  not  last  long  —  and  if 
rumor  be  credited  its  demise  carried  with  it  a  part 
of  the  capital  of  the  firms  involved.  It  was  a 
lesson  and  a  warning.  All  these  instances  serve 
to  show  that  the  Stock  Exchange  is  doing  what 
it  can  to  remedy  this  evil,  and,  if  circumstances 
arise  in  which  more  can  be  done,  the  governors 
and  members  will  be  found  a  unit  in  enforcing 
whatever  restrictions  are  necessary. 

At  the  moment  it  is  difficult  to  see  how  an 
inflexible  rule  of  20  per  cent,  margins  could  be 
put  in  practice  without  seriously  interfering  with 
really  sound  business. .  A  telegraphic  order  may 
be  received  from  a  customer  of  the  utmost  respon- 
sibility who  may  happen  to  be  in  Europe.  Any 
stockbroker,  and  any  business  man  in  mercantile 


58     THE  STOCK  EXCHANGE  FROM  WITHIN 

trade,  would  be  glad  to  execute  for  such  a  person 
all  the  orders  he  chose  to  entrust,  regardless  of 
margins.  In  such  a  case  no  question  of  motive 
enters  into  the  transaction;  it  may  ultimately 
prove  to  be  a  speculation  pure  and  simple,  or  the 
buyer  may  cable  instructions  to  deliver  the 
securities  to  his  bank,  in  which  case  it  would 
seem  to  be  an  investment;  but,  regardless  of 
that,  an  insistence  by  the  broker  on  a  20  per 
cent,  margin  would  be  silly,  and  would  merely 
drive  the  business  elsewhere  or  prevent  it  alto- 
gether. 

Numerous  instances  of  a  similar  sort  might  be 
cited  to  show  how  difficult  it  would  be  to  enforce 
margin  prohibitions  in  all  these  perfectly  legal 
contracts.  Germany  tried  it  in  the  law  of  1896, 
with  disastrous  consequences,  which  I  have  de- 
scribed elsewhere.  It  is  a  matter  that  will  always 
be  a  fruitful  topic  of  discussion,  yet  it  differs  in 
no  essential  respect  from  the  practice  of  a  specu- 
lator in  real  estate  who  pays  down  a  small  per- 
centage of  a  purchase  price  and  borrows  the 
balance  on  mortgage.  It  is  similar  to  what  the 
merchant  does  when  he  fills  his  shelves  with  goods 
bought  with  a  fractional  .payment  in  cash  and 
the  balance  at  some  future  date.  In  all  these 
cases  involving  property  let  me  repeat  that  the 
deposit  of  a  specified  sum  by  the  principal  and  an 


SPECULATION  59 

agreement    or    contract    with    the    broker    is    a 
perfectly  vaHd  transaction.* 

That  newspaper  criticism  and  attacks  by  social 
mentors  should  go  to  extreme  lengths  in  depre- 
cating stock  speculation  by  crude,  greedy,  and 
unsophisticated  people  is  perhaps,  after  all,  a 
perfectly  useful  function,  and  if  such  critics  err 
in  going  to  great  extremes,  that  too  may  be  set 
down  as  right  and  proper,  for  it  is  perhaps  better 
to  go  too  far  than  not  to  go  far  enough.  The 
interests  of  the  Stock  Exchange  are  the  interests 
of  the  whole  country;  its  welfare  depends  upon  an 
intelligent  and  thrifty  people;  its  aims  are  public- 
spirited  and  patriotic.     Whatever  it  may  lose  in 

*  The  governors  of  the  Stock  Exchange,  when  asked  by  the  Hughes 
Commission,  "Would  a  change  in  the  practice  of  dealing  on  margins  be 
desirable?"  replied  as  follows: 

"The  practice  of  dealing  on  margins  is  absolutely  essential  to  the  conduct 
of  many  transactions,  whether  in  stocks  or  bonds.  To  prohibit  it  would 
be  to  deny  to  a  man  the  right  to  invest  his  funds  and  to  purchase  property 
upon  such  terms  as  he  pleases.  As  well  might  the  purchase  of  real  estate, 
where  a  portion  of  the  consideration  is  left  on  mortgage,  be  prohibited. 
The  responsibility  of  the  individual  enters  so  largely  into  these  transactions 
that  it  will  be  impossible  to  define  specific  instances  where  the  margin  would 
be  too  small  or  unnecessarily  great.  It  is  to  be  left  to  the  discretion  of  the 
bankers,  as  well  as  to  the  judgment  of  those  who  furnish  the  money  upon 
which  these  transactions  are  based.  There  may  be  certain  classes  of  securi- 
ties, like  city  bonds  or  government  bonds,  where  a  very  small  margin 
is  ample.  There  may  be  other  transactions  in  stocks  selling  at  very  high 
prices  where  a  very  strong  margin  should  be  required.  Like  many  other 
details  of  a  banking  and  brokerage  business,  these  matters  are  frequently 
subjects  of  arrangement,  whereby  the  broker  protects  himself  and  a  satis- 
factory protection  is  given  to  him  by  his  client.  It  would  be  manifestly 
impossible  for  the  enactment  of  rules  or  regulations  suitable  to  every  case, 
and,  in  conclusion,  we  would  say  that  it  is  almost  unknown  for  an  institution, 
bank,  or  trust  company,  to  lose  money  upon  any  loans  made  on  margins  to 
members  of  the  Stock  Exchange  in  good  standing." 


6o      THE  STOCK  EXCHANGE  FROM  WITHIN 

the  way  of  business  from  ignorant  and  silly 
people  who  are  driven  out  of  blind  speculative 
undertakings  leading  to  losses  which  they  can 
ill  afford,  it  will  gain  tenfold  in  imparting  sound 
information  through  candor  and  publicity.  On 
the  other  hand,  unless  we  are  prepared  to  abolish 
property  altogether,  do  away  with  the  instru- 
ments of  credit,  and  suppress  all  forms  of  trading 
designed  to  supply  our  future  requirements,  we 
may  as  well  reconcile  ourselves  to  the  inevitable 
and  take  what  comfort  we  may  in  the  reflection 
that  prudence,  thrift,  and  foresight  are  not  to  be 
eliminated,  merely  because  the  proletariat  below 
stairs  sometimes  indulges  in  speculation  and  suffers 
the  consequences  of  its  folly. 

"Finally,"  writes  Professor  Emery,  "the  ques- 
tion must  be  faced  of  the  effect  of  eliminating 
the  public  from  the  speculative  market  even  if 
it  could  be  accomplished.  It  is  supposed  some- 
times that  such  a  result  would  be  all  benefit 
and  no  injury.  On  the  contrary,  the  real  and 
important  function  of  speculation  in  the  field  of 
business  can  only  be  performed  by  a  broad  and 
open  market.  Though  no  one  would  defend 
individual  cases  of  recklessness  or  fail  to  lament 
the  disaster  and  crime  sometimes  engendered, 
the  fact  remains  that  a  'purely  professional  mar- 
ket' is  not  the  kind  of  market  which  best  fulfils 


SPECULATION  6i 

the  services  of  speculation.  A  broad  market  with  the 
participation  of  an  intelligent  a?id  responsible  public 
is  necessary.  A  narrow  professional  market  is  less 
serviceable  to  legitimate  investment  and  trade  and 
much  more  susceptible  of  manipulation.''^* 

One  of  the  difficulties  with  which  men  have  to 
contend  in  a  big  country  like  this  is  the  apparent 
inability"  of  large  masses  of  the  people  to  under- 
stand other  large  masses.  Distances  are  so  great, 
occupations  so  diverse,  and  enterprise  so  confining, 
that  one  whole  section  of  the  country  may  not  and 
often  does  not  know  what  another  section  is  doing. 
Men  are  too  busy  to  learn  by  travel  and  reading 
that  which,  in  the  interest  of  the  whole  country, 
they  should  thoroughly  understand.  Thus  it 
happens  that  a  section  of  the  country  given  over, 
let  us  say,  to  agricultural  pursuits,  having  first 
acquired  the  notion  that  speculation  in  securities 
is  only  a  form  of  legalized  robbery,  assumes  that 
to  New  York  City  and  the  New  York  Stock 
Exchange  is  confined  a  greater  part  of  the  stock 
speculation  of  the  world.  We  have  seen  the 
fallacy  in  the  first  of  these  hasty  conclusions;  the 
second  may  easily  be  explained  away. 

Yankee  speculation  in  securities  is  not  a  marker 
to  speculation  in  London,  where  the  day  to  day 


*  "  Ten  Years'   Regulation  of  the  Stock  Exchange  in  Germany."  Yale 
Review,  May  1908,  q.  v.,  post. 


62     THE  STOCK  EXCHANGE  FROM  WITHIN 

trading  vastly  exceeds  ours,  and  where  the 
*' Kaffir  Circus"  of  1894-5  and  the  "Rubber 
Boom"  of  1909-10  exceeded  any  similar  outburst 
ever  known  in  America.  France  is  the  most 
prudent  and  thrifty  of  nations,  yet  the  Panama 
mania  which  collapsed  in  1894,  although  followed 
by  a  period  of  the  utmost  repentance  and  con- 
servatism, found  a  parallel  in  the  crazy  French 
speculation  in  Russian  industrials  which  crashed 
in  191 2.  There  was  an  extraordinary  speculation 
in  Egyptian  land  and  financial  companies  in 
Cairo  in  1905-6,  which,  in  proportion  to  the 
number  of  participants,  greatly  exceeded  any 
boom  in  New  York.  China  awakens  slowly, 
but,  once  Its  political  reforms  are  effected,  a  field 
of  extraordinary  speculation  will  open  there 
without  a  parallel  In  history.  The  Chinaman  is 
not  only  a  shrewd  and  competent  business  man, 
but  he  is,  Mr.  Hirst  tell^  us,  "a  confirmed  and 
incurable"  speculator.  "From  time  to  time," 
says  this  writer,  "the  Shanghai  Stock  Exchange 
becomes  a  scene  of  the  wildest  speculation,  and 
it  Is  safe  to  predict  that,  when  a  new  China  is 
evolved,  Stock  Exchanges  will  spring  up  in  all 
the  large  towns.  Of  this,  a  foretaste  was  aflForded 
in  the  spring  and  summer  of  1910,  when  Shanghai 
caught  the  rubber  infection  from  London.  All 
classes  and  races  took  part,  but  the  native  China- 


SPECULATION  63 

man  plunged  deepest.  When  the  break  in  prices 
came,  one  Chinese  operator  was  so  heavily  involved 
that,  on  his  failure,  many  of  the  native  banks  had 
to  suspend  payment,  with  the  result  that  for 
months  the  trade  and  credit  of  this  great  shipping 
and  business  centre  were  disorganized.* 

I  mention  these  incidents  to  show  that  specu- 
lation is  not  confined  to  geographical  limits. 
It  is  all  a  part  of  the  "divine  unrest"  inherent 
in  each  of  us,  and  it  develops  and  grows  intense 
just  in  proportion  with  the  march  of  the  civiliza- 
tion it  serves  to  benefit.  In  new  countries,  as  in 
China,  it  may  often  go  too  far;  sometimes  in  old 
countries  it  oversteps  the  bounds  of  prudence,  but 
any  student  of  these  phenomena  knows  that,  as 
economic  processes  become  understood  by  the  mas- 
ses, the  intervals  of  time  between  the  panics  that 
result  from  over-speculation  grow  wider  and  wider. 

Another  mistake  of  those  sections  of  the  coun- 
try that  do  not  understand  the  Stock  Exchange 
results  from  the  indiscriminate  blending  of  that 
institution  with  Wall  Street.  Let  us  hear  from 
Mr.  Horace  White  on  this  point.  He  was  the 
chairman  of  the  last  committee  that  investigated 
the  Stock  Exchange;  he  is  one  of  our  foremost 
economists,  and  he  may  be  assumed  to  under- 
stand his  subject: 

*"The  Stock  Exchange,"  by  Francis  W.  Hirst,  London,  191 1,  p.  loi" 


64    THE  STOCK  EXCHANGE  FROM  WITHIN 

"There  is  a  widespread  belief  that  Wall  Street  and  the 
Stock  Exchange  are  one  and  the  same  thing,  and  that  all 
the  fluctuations  on  the  Exchange  are  caused  by  Wall  Street. 
This  is  an  error  as  glaring  as  it  would  be  to  suppose  that  all 
the  water  in  the  Mississippi  River  comes  from  the  adjacent 
banks,  ignoring  the  innumerable  streams  and  rills  that 
contribute  their  quota  from  countless  unseen  sources.  Wall 
Street  and  the  Stock  Exchange  are  two  different  things. 
The  men  on  the  floor  of  the  Exchange  are  the  agents  of 
others,  executing  the  orders  which  they  receive  both  from 
Wall  Street  and  from  other  parts  of  the  habitable  globe. 
Some  of  them  speculate  on  their  own  account,  but  the  specu- 
lating members  of  the  Exchange  are  divided  into  bulls  and 
bears.  They  do  not  all  push  in  the  same  direction  at  any 
one  time.  They  simply  aim  to  anticipate,  each  for  himself, 
the  drift  of  financial  public  opinion  in  order  to  take  advantage 
of  it. 

"This  is  what  Wall  Street  outside  of  the  Exchange  does; 
and  the  only  advantage  which  speculators  in  Wall  Street 
have  over  those  in  other  parts  of  the  country  is  derived 
from  larger  capital,  more  direct  and  ample  sources  of  informa- 
tion, and  greater  skill  and  promptness  in  the  use  of  it. 
Wall  Street  speculators  are  likewise  divided  into  l^uUs  and 
bears  pushing  against  each  other;  and  all  their  advantages 
do  not  save  them  from  making  mistakes,  which  often  result 
in  losses  proportioned  to  the  magnitude  of  their  operations. 
The  'rich  men's  panic'  of  1903  was  such  an  instance.  The 
panic  of  1 907  was  another.  It  is  sometimes  said  that  Wall 
Street  can  put  prices  on  the  Stock  Exchange  up  or  down 
at  its  own  pleasure.     This  is  a  delusion."* 

Members  and  friends  of  the  New  York  Stock 
Exchange   view   with   apprehension   the   periodic 


*  "The  Hughes  Investigation,"  by  Horace  White,  Journal  of  Political 
Economy,  October,  1909,  pp.  532-3. 


SPECULATION  65 

attacks  upon  their  great  institution  made  by 
those  who,  for  reasons  not  to  be  discussed  here, 
wish  to  attract  popular  attention.  But  there  is 
no  reason  why  these  matters  should  excite  alarm. 
The  Exchange  purified  itself  long  ago  of  the  old 
abuses,  new  ones  as  they  occur  meet  with  severe 
disciplinary  measures,  and  it  has  a  certificate  of 
good  character  in  the  report  made  to  the  sovereign 
State  of  New  York  by  the  Hughes  Commission. 
This  commission  has  stated  explicitly  that  margin 
trading  Is  a  matter  of  contract  guaranteed  by  the 
Federal  Constitution.  It  is  not  conceivable  that 
any  legislature  can  ignore  such  a  report,  by  such  a 
commission,  nor  is  It  possible  that,  in  such  event, 
any  court  could  be  found  to  uphold  legislation 
directed  at  random  against  an  institution  that 
bears  the  endorsement  of  all  students  of  eco- 
nomics. 

One  has  but  to  read  the  decisions  of  the  courts 
to  see  that  the  matter  of  non-interference  with  the 
great  Exchanges,  on  technical  grounds,  has  become 
a  fixture  in  our  jurisprudence.  "The  Exchanges, " 
said  Judge  Grosscup  of  the  United  States  Circuit 
Court,  "balance  like  the  governor  of  an  engine 
the  otherwise  erratic  course  of  prices.  They 
focus  intelligence  from  all  lands,  and  the  prospects 
for  the  whole  year,  by  bringing  together  minds 
trained   to  weigh   such   intelligence   and  to  fore- 


66    THE  STOCK  EXCHANGE  FROM  WITHIN 

cast  the  prospects.  They  tend  to  steady  the 
markets  more  nearly  to  their  right  level  than  if 
left  to  chance  or  unhindered  manipulation."*  In 
somewhat  similar  vein  Justice  Holmes  of  the 
United  States  Supreme  Court,  said:  "Specula- 
tion ...  is  the  self-adjustment  of  society 
to  the  probable.  Its  value  is  well  known  as  a 
means  of  avoiding  or  mitigating  catastrophes, 
equalizing  prices,  and  providing  for  periods  of 
want.  It  is  true  that  the  success  of  the  strong 
induces  imitation  hy  the  weak,  and  that  incompetent 
persons  bring  themselves  to  ruin  hy  undertaking  to 
speculate  in  their  turn.  But  legislatures  and  courts 
generally  have  recognized  that  the  natural  evolutions 
of  a  complex  society  are  to  he  touched  only  with  a 
very  cautious  hand,  and  that  such  coarse  attempts 
at  a  remedy  for  the  waste  incident  to  every  social 
function  as  a  simple  prohibition  and  laws  to  stop  its 
heing,  are  harmful  and  vain,  "f 

With  these  opinions  before  them,  so  long  as  the 
governors  of  the  Stock  Exchange  continue  their 
policy  of  a  wise  and  dignified  administration  in 
the  interest  of  the  public  they  serve,  there  is 
nothing  to  fear.  Corrections,  remedies,  improve- 
ments, and  reforms  will  be  found  to  be  necessary 
from  time  to  time  —  some  of  them  are  necessary 


*  "Board  of  Trade  Case,"  88  Fed.  868, 

t  "Chicago  Board  of  Trade  Case,"  May  8,  1905. 


SPECULATION  67 

at  this  moment,  and  the  governors  are  hard  at 
work  on  the  task.  To  accuse  them  of  indifference 
or  neglect  of  duty  is  to  deny  them  that  form  of 
intelligence  which  enables  a  man  to  protect  his 
property.  Their  splendid  institution  has  grown 
to  Its  present  Importance  and  power  through 
economic  development  that  could  not  have  been 
foreseen  nor  prevented.  Speculation  on  a  large 
scale  has  accompanied  its  growth,  and  contributed 
to  it;  and  speculation,  as  we  have  seen,  is  a  highly 
desirable  and  useful  part  of  all  business.  This 
speculation  numbers  among  its  adherents  people 
In  all  parts  of  the  world  who  have  a  perfect  right 
to  speculate,  and  who  do  vastly  more  good  than 
harm  In  their  operations. 

It  has  also  attracted  a  great  many  people  who 
have  no  business  to  speculate,  and  who  would  be 
prevented  from  doing  so  If  It  were  possible.  The 
ignorance  and  cupidity  of  these  people  Is  so  great, 
and  the  pitfalls  provided  them  by  unscrupulous, 
methods  outside  the  Exchange  are  so  many  and 
various  that  something  has  to  be  done  to  protect 
them.  The  Stock  Exchange  does  not  encourage 
them,  but  it  recognizes  that  they  have  legal  if  not 
moral  rights,  and  it  stands  ready  to  help  them.  It 
gives  to  such  people  the  same  information  that  It 
gives  to  the  richest  investor  In  the  land.  The  secu- 
rities in  which  It  deals  are  known  to  be  free  from 


68    THE  STOCK  EXCHANGE  FROM  WITHIN 

taint;  all  forms  of  crookedness  are  prohibited;  every 
transaction  within  its  walls  is  made  openly,  as  a 
result  of  free  competitive  bidding,  and  published 
broadcast  to  the  world.  What  more,  and  what 
less,  can  be  done?  Has  there  ever  been  a  time 
in  the  world's  history  when  property  and  trade 
were  so  secure,  and  when  speculation,  which 
makes  property  and  trade,  was  so  jealously  safe- 
guarded ? 


*Several  authorities  among  those  quoted  in  this  chapter  have  been  taken 
from  Mr.  Frank  Fayant's  pamphlet,  "Some  Thoughts  on  Speculation,"  N.Y., 
1909.  It  would  be  difficult  to  compress  in  small  space  a  more  instructive 
array  of  data  than  that  presented  in  Mr.  Fayant'»  work. 


CHAPTER  III 

THE    BEAR   AND    SHORT    SELLING 


CHAPTER  III 

THE  BEAR  AND  SHORT  SELLING 

The  operations  of  "bears"  in  the  great  speculative 
markets  and  the  practice  of  "short  selling"  are 
riddles  which  the  layman  but  dimly  comprehends. 
Buying  in  the  hope  of  selling  at  a  profit,  and  if 
need  be,  "holding  the  baby"  for  a  long  time  and 
"nursing"  it  until  the  profit  appears,  is  simple 
enough;  but  an  Oedipus  is  required  to  solve  the 
enigma  of  selling  what  one  does  not  possess,  and  of 
buying  it  at  a  profit  after  the  price  has  cheapened. 
It  is  the  most  complicated  of  all  ordinary  com- 
mercial transactions.  How  the  thing  can  be 
done  at  all  is  a  mystery;  how  such  a  man  can  serve 
a  really  useful  economic  purpose  by  this  process 
is  unfathomable.  The  layman  who  tries  to  figure 
it  out  thinks  there  Is  an  Ethiopian  somewhere  in 
the  wood-pile;  the  thing  is  unreal  and  fictitious. 
The  only  way  he  can  understand  it  is  to  turn  bear 
himself  and  learn  by  experience. 

Why  there  should  be  so  many  bulls  and  so  few 
bears  can  only  be  explained  on  the  ground  that 
optimism  is  the  basis  of  speculation,  and  hope  the 

71 


72    THE  STOCK  EXCHANGE  FROM  WITHIN 

essence  of  it.  Yet  the  market  can  only  go  two 
ways:  It  is  quite  as  likely  to  go  down  as  up. 
Since  sentiment  should  have  no  place  in  specula- 
tion one  v/ould  think  there  should  be  as  many  bears 
as  bulls,  more  of  them,  in  fact,  because  the  market 
almost  always  goes  down  faster  than  it  goes  up, 
and  because  nine  out  of  ten  of  the  unforeseen 
things  that  occur  result  in  lower  prices. 

Accidents  like  diplomatic  entanglements,  rumors 
of  war,  earthquakes,  and  drought  are  constantly 
occurring  to  upset  the  plans  of  bulls  and  bring  fat 
profits  to  bears  in  a  hurry,  while  matters  that  bring 
about  higher  markets  are  generally  things  long 
anticipated,  in  which  the  profits  that  accrue  to  the 
bulls  come  about  slowly  and  laboriously,  and  always 
with  the  attendant  risk  that  a  disturbance  in  any 
corner  of  the  globe  may  bring  on  a  sudden  smash 
that  will  undo  the  upbuilding  of  months.  In 
theory,  therefore,  there  should  be  at  least  as  many 
bears  as  bulls  in  all  active  markets,  but  in  prac- 
tice the  large  majority  are  always  bulls,  to  whose 
sanguine  and  credulous  natures  the  bear  is  a  thing 
apart  —  a  gloomy  and  misanthropic  person  hover- 
ing about  like  a  vulture  awaiting  the  carrion  of  a 
misfortune  in  the  hope  of  a  profit.  Naturally  the 
layman  cannot  understand  him,  and  would  like 
to  suppress  him. 

Despite  the  fact  that  the  odds  seem  to  favor 


THE  BEAR  AND  SHORT  SELLING  73 

the  bears,  there  Is  an  old  and  true  saying  that  no 
Ursa  Major  ever  retired  with  a  fortune.  Wall 
Street  has  seen  many  of  them,  and  with  perhaps 
one  exception  the  records  agree  that  the  chronic 
pessimists  have  not  succeeded.  Fortune  seems 
to  have  smiled  on  them  at  intervals;  in  the  coun- 
try's early  days  of  construction  and  development 
mistakes  were  made  that  brought  about  disaster, 
but  in  the  long  run  such  tremendous  progress  has 
resulted  in  America  as  to  defeat  the  aspirations  of 
any  man  or  group  of  men  who  stood  in  its  way. 
The  big  bears,  as  a  rule,  have  "over-stayed  the 
market."  Imbued  with  the  hope  that  worse 
things  were  in  store,  they  have  been  swept  away 
by  the  forces  they  sought  to  oppose.  One  of  them, 
a  power  in  his  day,  was  so  obsessed  with  the  notion 
that  all  prices  were  inflated,  that  he  has  been 
known  to  sell  stocks  short  "for  investment." 
One  night  when  a  lady  at  his  side  remarked  on  the 
beauty  of  the  moon,  he  is  said  to  have  replied 
with  that  absent-minded  mechanical  skepticim 
Inherent  In  the  bear,  "yes,  but  It's  too  high;  it 
must  come  down." 

One  would  think  the  ideal  temperament  for  a 
speculator  would  be  absolute  Impartiality,  with  an 
open  mind  uninfluenced  by  sentiment,  ever  ready 
to  take  advantage  of  all  fluctuations  as  they 
occur.     The  ups   and   downs  of  a   stock  market 


74    THE  STOCK  EXCHANGE  FROM  WITHIN 

always  show,  on  average  long  periods,  a  practi- 
cally equivalent  swing  each  way,  so  it  would  seem 
that  the  speculator  most  likely  to  profit  by  these 
fluctuations  would  be  one  without  preconceived 
prejudices,  ready  at  all  times  to  turn  bull  or  bear 
as  the  occasion  required.  As  a  matter  of  fact, 
this  type  is  the  rarest  of  all,  being  confined,  gener- 
ally speaking,  to  the  professional  "traders"  on 
the  large  exchanges,  necessarily  a  very  small 
minority  of  the  speculative  group,  yet  withal 
perhaps  the  most  uniformly  successful.  These 
men,  it  must  be  understood,  are  not  speculators, 
but  traders,  a  nice  distinction  involving  "catching 
a  turn,"  as  opposed  to  the  speculative  habit  of 
"taking  a  position." 

In  active  times  I  have  known  one  of  them 
to  operate  simultaneously  in  the  New  York 
Stock  market,  in  the  cotton  market,  and  in  the 
wheat  market,  trading  at  the  same  time  in 
London  and  Paris,  "shifting  his  position,"  or 
"switching"  from  the  bull  to  the  bear  side  twice 
in  a  single  day,  and  closing  all  his  trades  at  three 
o'clock  with  a  total  net  profit  of  less  than  a  thou- 
sand dollars  on  a  turnover  of  30,000  shares,  to 
say  nothing  of  the  transactions  in  cotton  and 
grain.  It  goes  without  saying  that  to  do  all  these 
things  in  one  day  requires  a  curiously  mercurial 
temperament,    and    calls    for   nerve   and    celerity 


THE  BEAR  AND  SHORT  SELLING  75 

altogether  foreign  to  the  average  speculator. 
Such  a  man,  moreover,  contributes  but  little  to 
the  making  of  prices  and  values,  which  is  the  func- 
tion of  large  markets;  his  chief  economic  usefulness 
lies  rather  in  the  enormous  revenues  he  pays  to  the 
State.  The  man  whose  operations  I  have  just 
described  contributed  in  a  single  year  ^75,000 
to  the  State  Government  in  stock-transfer  taxes. 

The  scientific  way  to  measure  the  value  of 
speculators  in  wide  markets  is  to  consider  the  bull 
as  one  whose  purchases  in  times  of  falling  prices 
serve  to  minimize  the  decline,  and  the  bear  as  one 
who  serves  a  doubly  useful  purpose  in  minimizing 
the  advance  by  his  short  sales  and  in  checking  the 
decline  by  covering  those  sales.  All  these  opera- 
tions serve  useful  economic  purposes,  since  the 
more  buyers  and  sellers  there  are,  the  greater  the 
stability  of  prices  and  the  nearer  the  approach  of 
prices  to  values. 

This,  as  I  have  said,  is  the  scientific  way  to  look 
at  it,  and  the  correct  way,  but  the  popular  way  is 
something  quite  different.  From  this  point  of 
view  the  man  who  sells  property  he  does  not  im- 
mediately possess  is  thought  to  be  a  menace,  who 
depresses  prices  artificially  and  works  a  disad- 
vantage to  the  investor  or,  in  the  produce  markets, 
to  the  producer.  Nothing  could  be  more  fal- 
lacious than  this,  because  of  the  fact  that  just  as 


76    THE  STOCK  EXCHANGE  FROM  WITHIN 

every  routine  sale  of  actual  stock  requires  a  buyer, 
so  every  short  sale  by  a  bear  requires  a  purchase 
by  him  of  equal  magnitude.  And  it  is  precisely 
these  repurchasing  or  "covering"  operations  of 
the  bears  that  do  the  utmost  good  in  the  way  of 
checking  declines  in  times  of  panic  or  distress. 

When  there  are  no  bears,  or  when  their  posi- 
tion is  so  slight  as  to  be  inconsequential,  declines 
are  apt  to  run  to  extreme  lengths  and  play  havoc 
with  bulls.  One  often  hears  among  acute  and 
clever  speculators  the  expression  "the  bears  are 
the  market's  best  friends,"  and,  though  this  may 
seem  incongruous,  it  is  quite  true.  In  the  month 
in  which  these  lines  are  written  there  has  occurred, 
for  example,  a  really  severe  break  in  prices  on  the 
Stock  Exchanges  at  London,  Paris,  and  Berlin, 
arising  from  the  periodic  Balkan  crisis.  This 
decline  ran  to  disproportionate  extremes,  and,  in 
fact,  approached  such  demoralization  that  more 
than  300,000  shares  of  American  securities  held 
abroad  were  thrown  on  the  New  York  market 
for  what  they  would  bring.  The  reason  for  the 
severity  of  this  decline  was  easily  explained.  The 
outstanding  speculative  account  at  all  European 
centres,  while  not  actually  unwieldy,  was  almost 
entirely  in  the  nature  of  commitments  for  the 
rise.  There  was  no  bear  account.  Therefore  all 
Stock  Exchanges  were  supersensitive   since  they 


THE  BEAR  AND  SHORT  SELLING  77 

lacked  the  steadying  influence  which  covering  by 
the  bears  invariably  brings  about.  The  bears  are 
then,  in  truth  the  market's  best  friends,  and  the 
more  there  are  of  them,  the  better  for  all  con- 
cerned when  trouble  comes. 

Throughout  all  the  political  agitation  in  Ger- 
many which  culminated  in  that  disastrous  failure, 
the  Bourse  Law  of  1896,  there  appears  to  have 
been  very  little  opposition  to  the  bear  and  the 
practice  of  short  selling;  nevertheless  in  that 
section  of  the  law  which  prohibited  dealings  for 
future  delivery  the  bears  found  their  activities 
restricted.  The  law  has  now  been  amended, 
having  proved  a  wretched  fiasco,  but  in  the 
decade  which  attended  its  enforcement  it  was 
curious  to  note  the  unanimous  cry  that  went  up 
in  Germany  for  the  restoration  of  the  bear.  His 
usefulness  in  the  stock  market  no  less  than  in  the 
commodity  market  was  recognized;  his  suppres- 
sion was  deplored.  It  was  found  that  just  as 
his  activities  were  restricted  so  the  tendency 
toward  inflated  advance  and  ultimate  collapse 
was  increased.  The  market  became  one-sided, 
and  hence  lop-sided;  quotations  thus  established 
were  unreal  and  fictitious.  Moreover  there  was 
an  incentive  to  dishonesty,  for  unscrupulous  per- 
sons could  open  a  short  account  in  one  office  and 
a  long  account  in  another,  and  if  the  bear  side 


78    THE  STOCK  EXCHANGE  FROM  WITHIN 

lost  they  could  refuse  to  settle  on  the  ground 
customarily  resorted  to  by  welchers. 

"The  prices  of  all  industrial  securities  have 
fallen,"  said  the  Deutsche  Bank  In  1900,  "and 
this  decline  has  been  felt  all  the  more  because  by 
reason  of  the  ill-conceived  Bourse  Law,  It  struck 
the  public  with  full  force  without  being  softened 
through  covering  purchases  "  —  I.  e.,  by  the  bears. 
Again,  four  years  later,  when  the  law  was  still 
In  force,  the  same  authority  states  "a  serious 
political  surprise  would  cause  the  worst  panic, 
because  there  are  no  longer  any  dealers  (shorts) 
to  take  up  the  securities  which  at  such  times  are 
thrown  on  the  market."  The  Dresdner  Bank  in 
1899  reported  that  the  dangers  arising  from  this 
prohibition  cannot  be  overestimated  "If  with  a 
change  of  economic  conditions  the  unavoidable 
selling  force  cannot  be  met  by  dealers  willing 
and  able  to  buy." 

"Short  sellers  do  not  determine  prices,"  says 
Professor  Huebner.  "By  selling  they  simply 
express  judgment  as  to  what  prices  will  be  In  the 
future.  If  their  judgment  Is  wrong  they  will 
suffer  the  penalty  of  being  obliged  to  go  Into  the 
market  and  buy  the  securities  at  higher  prices. 
Nine  tenths  of  the  people  are  by  nature  'bulls,' 
and  the  higher  prices  go,  the  more  optimistic  and 
elated  they  become.     If  it  were  not  for  a  group  of 


THE  BEAR  AND  SHORT  SELLING  79 

'short  sellers,'  who  resist  an  excessive  inflation,  it 
would  be  much  easier  than  now  to  raise  prices^^ 
through  the  roof;  and  then,  when  the  inflation 
became  apparent  to  all,  the  descent  would  be 
abrupt  and  likely  unchecked  until  the  basement 
was  reached.  The  operations  of  the  'bear,' 
however,  make  excessive  inflation  extremely  ex- 
pensive, and  similarly  tend  to  prevent  a  violent 
smash  because  the  'bear,'  to  realize  his  profits, 
must  become  a  buyer.  The  writer  has  been  told 
by  several  members  of  the  New  York  Stock  Ex- 
change that  they  have  seen  days  of  panic  when 
practically  the  only  buyers,  who  were  taking  the 
vast  volume  of  securities  dumped  on  the  exchange, 
were  those  who  had  sold  'short,'  and  who  now 
turned  buyers  as  the  only  way  of  closing  their 
transactions.  They  were  curious  to  know  what 
would  have  happened  in  those  panic  days,  when 
everybody  wished  to  sell  and  few  cared  to  invest, 
if  the  buying  power  had  depended  solely  upon  the 
real  investment  demand  of  the  outside  public. 

"In  reply  also  to  the  prevalent  opinion  that 
'short  selling'  unduly  depresses  security  values, 
it  should  be  stated  that  'short  sellers'  are  fre- 
quently the  most  powerful  support  which  the 
market  possesses.  It  is  an  ordinary  affair  to  read 
in  the  press  that  the  market  is  sustained  or  'put 
up'  at  the  expense  of  the  'shorts'  who,  having  con- 


8o    THE  STOCK  EXCHANGE  FROM  WITHIN 

tracted  to  deliver  at  a  certain  price  can  frequently 
easily  be  driven  to  'cover.'  Short  selling  is  thus 
a  beneficial  factor  in  steadying  prices  and  obvi- 
ating extreme  fluctuations.  Largely  through  its 
action,  the  discounting  of  serious  depressions  does 
not  take  the  form  of  a  sudden  shock  or  convul- 
sion, but  instead  is  spread  out  over  a  period  of 
time,  giving  the  actual  holder  of  securities  ample 
time  to  observe  the  situation  and  limit  his  loss 
before  ruin  results.  In  fact,  there  could  be  no 
organized  market  for  securities  worthy  of  the 
name,  if  there  did  not  exist  two  sides,  the  'bull' 
and  the  'bear.'  The  constant  contest  between 
their  judgments  is  sure  to  give  a  much  saner  and 
truer  level  of  prices  than  could  otherwise  exist. 
'No  other  means,'  reports  the  Hughes  Committee, 
'of  restraining  unwarranted  marking  up  and  down 
of  prices  has  been  suggested  to  us.'"* 

So  much  for  the  functions  of  the  bear  in  markets 
that  deal  in  invested  capital.  In  the  commodity 
markets  he  becomes  of  even  greater  value,  in- 
deed, he  is  well-nigh  indispensable.  Mr.  Horace 
White,  who  was  the  Chairman  of  the  Hughes 
Investigating  Committee,  cites  this  instance: 
"A  manufacturer  of  cotton  goods,  in  order  to 
keep  his  mill  running  all  the  year  round,  must 

*  "Scope  and  Functions  of  the  Stock  Market,"  by  Prof.  S.  S.  Huebner, 
Ph.  D.,  University  of  Pennsylvania.  "Annals  of  the  American  Academy 
of  Political  and  Social  Science,"  Vol.  XXXV,  No.  3,  May,  1910. 


THE  BEAR  AND  SHORT  SELLING  8i 

make  contracts  ahead  for  his  material,  before  the 
crop  of  any  particular  year  is  picked.  The  cotton 
must  be  of  a  particular  grade.  He  wishes  to  be 
insured  against  fluctuations  in  both  price  and 
quality;  for  such  insurance  he  can  afford  to  pay. 
In  fact  he  cannot  afford  to  be  without  it.  There 
are  also  men  in  the  cotton  trade,  of  large  capital 
and  experience,  who  keep  themselves  informed  of 
all  the  facts  touching  the  crops  and  the  demand 
and  supply  of  cotton  in  the  world,  and  who  find 
their  profit  in  making  contracts  for  its  future 
delivery.  They  do  not  possess  the  article  when 
they  sell  it.  To  them  the  contract  is  a  matter  of 
speculation  and  short  selling,  but  it  is  a  perfectly 
legitimate  transaction. 

"To  the  manufacturer  It  is  virtually  a  policy  of 
insurance.  It  enables  him  to  keep  his  mills 
running  and  his  hands  employed,  regardless  of 
bad  weather  or  insect  pests  or  other  uncertainties. 
The  same  principles  apply  to  the  miller  who 
wants  wheat,  to  the  distiller,  the  cattle-feeder, 
and  the  starch-maker  who  wants  corn,  to  the 
brewer  who  wants  hops  and  barley,  to  the 
brass  founder  who  wants  copper,  and  so  on  indefi- 
nitely. Insurance  is  one  of  two  redeeming  feat- 
ures of  such  speculation;  and  the  other,  which  is 
even  more  important,  is  the  steadying  effect  which 
it  has  on  market  prices.     If  no  speculative  buying 


82    THE  STOCK  EXCHANGE  FROM  WITHIN 

of  produce  ever  took  place,  It  would  be  impos- 
sible for  a  grower  of  wheat  or  cotton  to  realize  a 
fair  price  at  once  on  his  crop.  He  would  have  to 
deal  it  out  little  by  little  to  merchants  who,  in 
turn,  would  pass  it  on,  in  the  same  piecemeal  way, 
to  consumers.  It  is  speculative  buying  which  not 
only  enables  farmers  to  realize  on  their  entire 
crops  as  soon  as  they  are  harvested,  but  enables 
them  to  do  so  with  no  disastrous  sacrifice  of  price. 
When  buyers  who  have  future  sales  in  view  com- 
pete actively  with  each  other,  farmers  get  fair 
prices  for  their  produce."* 

And,  it  may  be  added,  the  same  satisfactory 
result  is  attained  when  bears  who  have  sold  the 
farmer's  crop  short  come  to  cover  their  short 
sales  by  buying  in  the  open  market;  their  buying 
steadies  the  market  if  there  is  a  tendency  to  de- 
cline; if  the  market  is  strong,  their  buying  helps 
make  it  stronger.  In  either  case  they  are  the 
farmer's  best  friends,  because  the  farmer  profits 
as  prices  advance. 

Speaking  of  farmers,  it  Is  well  known  that  much 
of  the  opposition  to  short  selling  and  dealing  In 
futures  in  the  large  markets  finds  Its  chief  advo- 
cates among  the  Western  and  Southern  politicians 
whose  constltutents  are  the  agricultural  classes. 
These  gentlemen  fulminate  strongly  against  the 

*  Journal  of  Political  Economy,  October,  1909,  pp.  531-2. 


THE  BEAR  AND  SHORT  SELLING  S3 

New  York  Stock  Exchange  and  the  grain  and 
cotton  exchanges,  and  in  currying  favor  with  their 
bucolic  supporters  they  do  not  hesitate  to  con- 
demn margin  trading,  short  seUing  and  every  other 
phase  of  speculative  markets.  Yet  it  does  not 
occur  to  them,  or,  if  it  does,  they  dare  not  refer  to 
it,  that  In  forming  pools  and  combinations  to  hold 
back  their  wheat  and  cotton  their  constituents  are 
doing  the  very  thing  which  they  so  strongly  con- 
demn in  speculative  centres.  The  farmer  is,  of 
course,  richer  than  he  ever  was  before,  but  never- 
theless he  grows  his  wheat  to  sell,  and  only  a  few 
can  carry  it  for  any  length  of  time  without  borrow- 
ing from  the  banks.  The  farmer  who  goes  into  one 
of  these  pools  with  wheat  valued  at  ^10,000  and 
who  borrows  ^8000  on  it  from  his  local  bank,  is 
nothing  more  nor  less  than  a  speculator  in  wheat  on 
a  20  per  cent,  margin,  and  the  same  horrid  appella- 
tion describes  the  cotton-planter  who  resorts  to 
similar  practices.* 

Now,  of  course,  there  is  no  moral  reason  why  a 
farmer  should  not  speculate  if  he  chooses,  but 
what  touches  us  on  the  raw  is  his  Phariseeism  in 
doing  for  himself  what  he  professes  to  abhor  and 
condemn  in  others.  One  is  tempted  to  say  un- 
kind things  to  the  farmer  at  such  times,  to  remind 
him,  for  example,  that  he  is  to-day  the  most  back- 

*  Consult  the  Wall  Street  Journal,  February  i8,  1909. 


84   THE  STOCK  EXCHANGE  FROM  WITHIN 

ward  and  unprogressive  factor  in  American  busi- 
ness life.  Despite  the  fact  that  the  Department 
of  Agriculture  has  spent  $100,000,000  on  his  edu- 
cation in  the  last  twenty  years,  he  has  not  yet 
begun  to  learn  what  the  German,  Dutch,  and 
French  farmers  learned  years  ago  in  intensive 
farming,  nor  has  he  mastered  the  art  of  cattle- 
raising  in  anything  like  the  degree  it  is  understood 
in  the  Argentine.  Nature  has  smiled  on  him;  he 
waxes  fat  with  her  bounty,  but  he  does  not  keep 
pace  with  the  growth  of  the  country.  Although 
enhancing  prices  are  paid  him  for  his  product, 
he  is  unable  to  raise  a  crop  proportionate  in  any 
degree  to  the  facilities  put  at  his  disposal  in  the  way 
of  fertilizers  and  machinery.  One  would  like  to 
"rub  it  in"  on  the  farmer,  but  one  doesn't,  "be- 
cause" as  a  recent  writer  puts  it,  "the  farmer  is  a 
farnier,  and  therefore  not  a  person  to  be  lectured 
like  a  mere  banker  or  broker  in  Wall  Street." 

To  the  farmer,  the  politician,  and  the  layman 
generally,  short  sales  of  cotton  or  grain  are  under- 
stood, approved,  in  fact,  if  the  grower  happens 
to  be  the  one  who  profits  by  them.  But  substi- 
tute stocks  and  shares  for  wheat  and  cotton,  and 
talk  of  "operations  for  a  fall,"  and  the  layman 
thinks  he  smells  a  rat.  He  sees  the  bale  of  cotton 
or  the  carload  of  wheat  actually  moving;  it  is  a 
concrete  thing;  it  appeals  to  his  senses,  it  is  com- 


THE  BEAR  AND  SHORT  SELLING  85 

prehensible.  But  talk  to  him  of  bits  of  paper 
called  stock  certificates,  and  by  a  curious  process 
he  concludes  that  a  short  sale  has  no  basis  of 
reality  and  is  therefore  menacing  and  improper. 
He  persuades  himself  that  short  selling  ought  to 
be  prohibited  by  law,  and,  since  Wall  Street  har- 
bors the  chief  offenders,  he  finds  In  the  nearest 
politician  a  handy  ally  to  assist  him.  These  gentle- 
men, who  obstinately  refuse  every  other  medica- 
ment, could  be  cured  of  their  ailment  by  a  strong 
diet  of  economics.  They  become  subjects  of 
medical,  rather  than  financial,  interest.  They 
should  dip  themselves  into  Conant  and  Leroy- 
Beaulieu;  they  should  cool  off  in  the  pages  of 
Bagehot  and  Emery;  and,  by  the  time  they  have 
got  into  the  soothing  columns  of  the  Hughes 
Commission's  report,  they  will  be  ready  for  new 
points  of  view. 

As  a  preparatory  lesson:  suppose  a  speculator 
buys  from  a  commission  merchant  a  carload  of 
coal  of  a  specified  grade.  The  coal  is  not  in  the 
possession  of  the  commission  merchant,  but  he 
knows  where  he  can  get  it,  and  he  knows  that  he 
can  deliver  it  on  the  date  agreed  upon.  Accord- 
ingly he  sells  it  short,  and  enters  into  a  binding 
contract  which,  happily,  the  courts  construe  to  be 
perfectly  legal.  Now  suppose  the  same  purchaser 
wishes  to  buy  100  shares  of  Pennsylvania  Railroad 


86  THE  STOCK  EXCHANGE  FROM  WITHIN 

stock.  All  Pennsylvania  stock  is  the  same,  that 
is  to  say  any  loo  shares  of  it  is  just  as  good  as 
any  other  lOO  shares  of  the  same  property  — 
the  number  on  the  certificate  is  of  no  importance 
whatever. 

The  dealer  to  whom  he  applies  does  not  hap- 
pen to  have  loo  Pennsylvania  on  hand,  but  he 
knows  where  he  can  get  it,  and  he  knows  that 
he  can  deliver  it  to  the  purchaser  on  the  follow- 
ing day.  So  he  sells  it  short,  and  all  that  remains 
to  complete  his  part  of  the  contract  is  the  actual 
delivery.  He  is  then  a  bear  on  Pennsylvania 
stock.  He  may,  if  he  chooses,  go  into  the  open 
market  and  buy  the  stock  at  once,  so  that  he  will 
be  able  to  deliver  it  in  the  easiest  and  most  direct 
way.  Or  he  may  feel  that  by  waiting  he  may  be 
able  to  buy  at  a  lower  price  than  that  at  which  he 
has  sold  it,  hence,  in  order  to  make  the  delivery 
promptly,  he  borrows  the  hundred  shares  from  one 
of  his  colleagues,  to  whom  he  pays  the  market 
price  as  security  for  the  temporary  loan  of  the 
certificate.*     In  a   day  or  two  the  price  of  the 


*  "The  borrower  is  also  bound  to  pay  the  lender  whatever  interest  by 
way  of  coupons  or  dividends  or  otherwise  and  all  bonuses  and  accretions 
that  would  have  been  paid  to  the  lender  on  the  securities  he  has  lent  had 
he  kept  them.  These  are  in  practice  treated  as  increases  to  the  market 
price  of  the  borrowed  securities.  The  reason  for  this  provision  is  that  the 
lender  is  the  actual  owner  of  the  securities  and  as  such  owner  he  is  entitled 
to  whatever  they  may  earn  by  way  of  interest  or  in  any  other  way.  He  has 
simply  temporarily  let  another  have  the  use  of  them,  and,  since  the  securities 
can  be  and  are  disposed  of  by  the  borrower,  the  lender  would  lose  the  interest. 


THE  BEAR  AND  SHORT  SELLING  87 

stock  may  have  declined,  whereupon  the  bear  goes 
into  the  market  and  buys  the  loo  shares  of  Penn- 
sylvania at  a  price,  say,  i  per  cent,  lower  than  that 
at  which  he  sold  it. 

When  this  certificate  is  delivered  to  him  next 
day,  he  delivers  it  in  turn  to  the  man  from  whom 
he  borrowed  the  original  100  shares;  his  security 
money  is  then  returned  to  him,  and  the  transac- 
tion is  closed.  It  is  just  as  real  a  transaction  as 
any  other,  and  just  as  legal.  Morever,  since  it  Is 
always  possible  to  buy,  but  not  always  possible 
to  sell,  the  active  presence  in  the  market  of  large 
numbers  of  bears  who  must  buy,  whether  they 
want  to  or  not,  Is  the  very  best  policy  of  Insurance 
that  a  holder  of  securities  could  have. 

Many  years  ago  there  was  a  law  on  the  French 
Statute  books,  subsequently  repealed,  prohibiting 
short  sales.  M.  Boscary  de  Villeplalne,  a  deputy 
chairman  of  the  association  of  stockbrokers,  was 
conversing  with  Napoleon  regarding  a  pending 
discussion  in  the  Council  of  State  looking  to  the 
repeal    of    the    law.       "Your   Majesty,"  said    de 


etc.,  which  is  paid  on  the  borrowed  securities  between  the  date  that  they 
are  borrowed  and  the  date  when  they  are  returned  and  the  loan  cancelled, 
unless  the  borrower  paid  an  equivalent  amount  to  him.  On  the  other 
hand,  any  assessment  the  lender  would  have  had  to  pay  on  the  borrowed 
securities  during  the  continuance  of  the  loan  is  a  charge  against  him;  for 
such  an  assessment  is  a  burden  adherent  to  ownership.  In  practice  it  is 
treated  as  a  reduction  of  the  market  price." — Eliot  Norton  "On  Short 
Sales  of  Securities  through  a  Stockbroker."  The  John  McBride  Co., 
New  York,  1907. 


88   THE  STOCK  EXCHANGE  FROM  WITHIN 

Villeplaine,  "when  my  water  carrier  is  at  the  door, 
would  he  be  guilty  of  selling  property  he  did  net 
own  if  he  sold  me  two  casks  of  water  instead  of  only 
one,  which  he  has?"  "Certainly  not,"  replied 
Napoleon,  "because  he  is  always  sure  of  finding 
in  the  river  what  he  lacks."  "Well,  your  Majesty, 
there  is  on  the  Bourse  a  river  of  Rentes."* 

Napoleon  felt,  no  doubt,  that  there  was  some- 
thing inherently  wrong  in  selling  short;  even  as 
these  lines  are  written,  counsel  for  a  Congres- 
sional committee  is  attempting  to  make  witnesses 
admit  that  the  practice  is  "imm.oral."  But 
why,  where,  how  is  it  immoral?  It  pervades  all 
business;  no  question  of  morals  or  ethics  enters 
into  It  at  all.  The  man  who  sells  you  a  motor-car 
has  not  got  It;  he  accepts  your  money  and  enters 
into  an  agreement  to  deliver  the  car  next  spring 
because  he  knows  or  believes  that  he  can  make  it 
and  have  it  ready  for  delivery  at  that  time. 
Meanwhile  he  has  sold  short.  A  gentleman  of  my 
acquaintance  has  sold  thousands  of  storage-bat- 
teries on  the  same  basis,  although  plans  for  them 
have  not  yet  been  designed  to  meet  the  specifi- 
cations. At  Cape  Cod  the  cranberry-growers  sell 
their  crop  before  it  has  begun  to  mature;  all  over 
the    land    contractors    and    builders    are    "going 


*  (Memorial  of  the  stockbrokers  addressed  to  the  Minister  of  Finance, 
1843,  p.  44,  footnote.     Quoted  by  Vidal,  q.  v.,  p.  46.) 


THE  BEAR  AND  SHORT  SELLING  89 

short"  of  the  labor  and  materials  which,  at  some 
time  in  the  future,  they  hope  to  obtain  to  fulfil 
the  terms  of  their  agreements.  Are  all  these 
worthy  people  "immoral"? 

If  it  is  immoral  to  sell  for  a  purpose,  it  is 
equally  immoral  to  huy  for  a  purpose;  in  each  case 
the  purpose  is  the  hope  of  a  profit.  Buying  for  a 
profit  is  approved  by  every  one;  why  not  selling.^ 
In  both  instances  you  have  bought  or  sold  for  a 
difference  in  price;  the  sequence  of  the  events  in 
no  way  involves  a  question  of  morals,  since  there 
is  no  ethical  difference  and  no  economic  difference 
between  buying  first  and  selling  last,  and  selling 
first  and  buying  last.  Moreover,  in  selling  short 
you  do  no  injury,  since  you  sell  to  a  buyer,  at 
his  price,  only  what  he  wants  and  is  willing  to 
pay  for.* 

All  suggestions  of  impropriety  in  short   selling 

*  Some  of  those  who  admit  the  value  of  the  stock  market  have  subjected 
to  severe  criticism  those  who  speculate  for  the  fall  of  stocks.  One  reads 
constantly  of  the  "bears"  trying  to  accomplish  such  and  such  results  by 
depressing  securities.  Napoleon  had  a  long  talk  with  MoUien,  his  Minister 
of  Finance,  in  seeking  to  demonstrate  that  those  who  sold  "short,"  in  the 
belief  that  national  securities  would  fall,  were  traitors  to  their  country. 
He  argued  that  if  these  men  were  selling  national  securities  for  future 
delivery  at  less  than  their  present  value  they  were  guilty  of  treason  to  the 
State.  But  Mollien  replied  in  substance:  "These  men  are  not  the  ones 
who  determine  the  price;  they  are  only  expressing  their  judgment  upon 
what  it  will  be.  If  they  are  wrong,  if  the  credit  of  our  State  is  to  be  main- 
tained in  the  future  at  its  former  high  standard,  in  spite  of  your  military 
preparations,  these  men  will  suffer  the  penalty  by  having  to  make  delivery 
at  the  price  for  which  they  sold,  for  they  must  go  into  the  market  and  buy 
at  the  price  then  prevailing.  It  is  their  judgment,  not  their  wish,  that  they 
express."  —  "Wall  Street  and  the  Country,"  by  Charles  A.  Conant,  pp. 
111-I12,  G.  P.  Putnam's  Sons,  New  York,  1904. 


90    THE  STOCK  EXCHANGE  FROM  WITHIN 

are  grotesque  in  their  absurdity.  But  suppose, 
for  purposes  of  argument,  that  economic  errors  of 
some  sort  were  actually  involved  in  this  practice. 
How  could  it  be  regulated  or  controlled^  As  the 
governors  of  the  Stock  Exchange  stated  to  the 
Hughes  Commission  in  1909,  short  selling  is  of 
different  descriptions.  There  is  the  short  sale 
where  the  security  is  held  in  another  country  and 
sold  to  arrive  pending  transportation.  There 
is  the  short  sale  where  an  individual  sells  against 
securities  which  he  expects  to  have  later,  but 
which  are  not  in  deliverable  form;  and  in  this  con- 
nection I  call  your  attention  to  the  recent  sale  of 
$50,000,000  of  Corporate  Stock  of  the  City  of 
New  York  where  deliveries  were  not  made  for  a 
period  of  about  three  months,  and  which  stock 
was  dealt  in  enormously,  long  before  it  was  issued. 
"If  a  market  had  not  been  provided  for  it  under 
those  conditions,"  said  the  governors,  "the  loan 
could  not  have  been  placed.  Then,  again,  there 
is  the  short  selling  of  stock  against  which  different 
and  new  securities  are  to  be  issued;  the  vendor 
knowing  that  he  is  to  receive  certain  securities  at 
a  distant  date,  but  desiring  to  realize  upon  them 
at  this  time.  Beyond  this,  there  is  the  regular  sell- 
ing of  short  stock,  either  by  parties  who  do  so  to 
hedge  a  dangerous  position  upon  the  long  side  of 
the  market,  or  the  sale  purely  and  simply  with  the 


THE  BEAR  AND  SHORT  SELLING  91 

Intention  of  rebuying  at  a  profit,  should  circum- 
stances favor  it." 

Finally,  there  is  the  investor  with  stock  in  his 
strong-box  actually  paid  for  and  owned  outright. 
He  may  wish  to  sell  in  a  strong  market  with  the 
hope  of  repurchasing  at  lower  prices,  but  for  rea- 
sons of  his  own  he  may  borrow  the  stock  for  de- 
livery rather  than  deliver  the  securities  bearing  his 
own  name.  Technically  he  is  short;  he  is  a  bear. 
But  in  his  case,  as  in  that  of  the  others  here 
cited,  how  can  this  perfectly  proper  method  of 
doing  business  be  "regulated"  or  interfered  with 
in  any  way.^  I  do  not  think  it  necessary  to  pur- 
sue so  palpable  an  absurdity. 

It  has  been  said  that  the  bears  often  resort  to 
unfair  methods  to  bring  about  declines  in  prices,, 
circulating  rumors  designed  to  alarm  timid  owners 
of  securities  and  thus  frighten  them  into  selling. 
That  this  is  done  every  now  and  then  is  undeni- 
able, but  the  opportunity  of  the  bear  in  these 
matters  is  very  limited,  and  may  be  easily  and 
speedily  investigated,  whereas  similar  practices 
by  the  bulls  in  inflating  values  by  all  sorts  of  gro- 
tesque assertions  and  promises  are  by  no  means  so 
easily  run  to  earth,  and  do  incalculably  more  harm. 

The  bear  who  drags  a  red-herring  across  the  trail 
now  and  then  interrupts  the  chase,  but  he  cannot 
stop  it;  the  genial  optimist  who  has  a  doubtful 


92    THE  STOCK  EXCHANGE  FROM  WITHIN 

concern  on  his  hands,  with  a  pack  of  enthusiastic 
buyers  in  full  cry  at  his  heels,  is  a  much  more 
serious  matter.  Good  times  and  bull  markets 
engender  many  questionable  practices  of  this  sort. 
*' All  people  are  most  credulous  when  they  are  most 
happy,"  says  Walter  Bagehot;  "and  when  much 
money  has  just  been  made,  when  some  people  are 
really  making  it,  when  most  people  think  they 
are  making  it,  there  is  a  happy  opportunity  for 
ingenious  mendacity.  Almost  everything  will  be 
believed  for  a  little  while,  and  long  before  discovery 
the  worst  and  most  adroit  deceivers  are  geographi- 
cally or  legally  beyond  the  reach  of  punishment. 
But  the  harm  they  have  done  diffuses  harm,  for 
it  weakens  credit  still  further.* 

If  this  book  were  written  for  people  instructed 
in  economic  matters  there  would  be  no  occasion 
to  dilate  upon  the  usefulness  of  bears  and  the  value 
of  short  selling,  but  since  we  are  addressing  lay- 
men who  do  not  understand  how  the  bear  can  be 
a  useful  factor,  we  may  venture  to  say  once  more 
that  insurance  is  the  chief  advantage  in  his  opera- 
tions. Ex-Governor  White's  contribution  to  the 
subject,  which  I  have  quoted  in  this  chapter,  is 
strongly  supported  by  Mr.  Conant,  who  shows 
that  valuable  progress  in  opening  new  countries 
and  developing  new  industries  is  often  made  pos- 

*  "Lombard  Street,"  p.  158. 


THE  BEAR  AND  SHORT  SELLING  93 

sible  by  "bearish"  operations  designed  to  "hedge" 
or  insure  the  new  undertaking  against  loss. 

"The  broker  who  has  a  new  security  which  he 
desires  to  place  from  time  to  time  in  the  future, 
making  possible,  for  instance,  the  opening  of  a 
new  country  to  railway  traffic,  protects  himself 
against  loss  resulting  from  future  changes  in 
market  conditions  by  selling  other  securities  for 
future  delivery  at  current  prices.  These  secur- 
ities will  realize  a  profit  when  the  date  arrives  for 
delivery  if  the  market  has  in  the  meantime  be- 
come unfavorable,  and  will  offset  the  loss  upon  his 
new  securities.  They  will  have  to  be  bought  at  a 
loss  if  the  movement  of  prices  has  been  upward, 
but  the  upward  movement  will  afford  a  profit 
upon  the  new  securities  which  he  is  seeking  to 
place  upon  the  market.  Thus,  to  quote  Georges- 
Levy,  'there  Is  a  genuine  insurance,  which  the 
broker  will  have  himself  organized  and  on  which 
he  will  willingly  pay  the  premium  for  protection 
against  any  accident.'  "* 

An  instance  such  as  this  serves  to  show  the 
difference  between  gambling  and  speculating, 
terms  that  are  often  misapplied  by  critics  of  stock 
markets.     A  gambler  seeks  and  makes  risks  which 


*  Charles  A.  Conant,  "Principles  of  Money  and  Banking"  (New  York, 
1905).  The  reader  is  invited  to  consult,  in  this  connection,  that  portion 
of  the  Report  of  the  Hughes  Commission,  (see  Appendix)  having  to  do 
with  short  selling. 


94   THE  STOCK  EXCHANGE  FROM  WITHIN 

it  is  not  necessary  to  assume,  and  which,  In  their 
assumption,  contribute  nothing  to  the  general 
uplift.  But  the  speculator  —  in  the  Instance  just 
cited,  a  bear  who  sells  short  —  volunteers  to  as- 
sume those  risks  of  business  which  must  Inevit- 
ably fall  somewhere,  and  without  which  the  mine, 
or  the  factory,  or  the  railroad  could  not  be  under- 
taken. His  profession,  and  the  daily  risks  he 
assumes,  call  for  special  knowledge  and  superior 
foresight,  so  that  the  probability  of  loss  Is  less 
than  It  would  be  to  others.  If  he  did  not  do  it  — 
if  there  were  no  bear  speculators  —  the  same  risks 
would  have  to  be  borne  by  others  less  fitted  to 
assume  them  or  the  useful  projects  in  question 
would  not  be  undertaken  at  all. 

So  general  is  the  employment  of  these  hedging 
or  insurance  operations  that  In  the  case  of  cotton 
—  to  cite  but  one  Instance  —  the  business  Is 
regarded  by  practically  all  cotton  merchants  as  an 
absolute  necessity  under  modern  methods  of  con- 
ducting business.  "An  Idea  of  the  value  of  the 
hedging  function  may  be  obtained,"  says  Herbert 
Knox  Smith,  Commissioner  of  Corporations, 
^'when  It  is  stated  that  in  Great  Britain  banks 
very  generally  refuse  to  loan  money  on  cotton 
that  Is  not  hedged.  Moreover,  it  Is  almost  uni- 
versally conceded  that,  since  the  introduction  of 
hedging,  failures  In  the  cotton  trade,  which  had 


THE  BEAR  AND  SHORT  SELLING  95 

previously  been  frequent,  have  been  materially- 
reduced  as  a  direct  result  of  the  greater  stability 
with  which  transactions  in  spot  cotton  can  be 
conducted."* 

In  conclusion  it  may  be  noted  that  as  early  as 
1732  an  attempt  was  made  In  England  to  prevent 
short  sales  by  law,  that  the  law  was  recognized  a 
mistake  and  subsequently  repealed.  To-day  there 
is  no  law  on  the  English  Statute  books  restricting 
speculation  In  any  form.  In  America  the  New 
York  State  Legislature  enacted  a  law  in  18 12  and 
the  Federal  Government  In  1864,  both  designed 
to  prevent  short  selling.  These  laws  have  also 
been  repealed  and  they  will  not  be  revived.  The 
bear  has  come  to  stay.  As  a  spectre  to  frighten 
amateurs,  he  may  continue  for  a  time  to  stalk 
abroad  o'  nights;  as  a  necessary  and  useful  part 
of  all  business  he  is  a  substantial  reality.  And 
he  Is  not  " Immoral. "f 


*  Report  of  the  Commissioner,  Washington,  1908. 

t  Despite  the  effort  to  avoid  technical  terms  in  these  pages,  the  value  of 
the  bear  should  be  considered  from  still  another  angle.  Smith,  a  bear,  sells 
short  to  Jones,  a  bull.  The  economic  usefulness  of  Jones  then  becomes 
problematical,  since  he  may  sell  out  at  any  moment.  His  permanence  as  a 
holder  or  owner  is  merely  optional,  and  his5usefulness  in  the  economic  scheme 
of  things  is  impaired.  As  a  market  factor  he  may  be  ignored.  But  there 
is  nothing  optional  about  Smith's  position,  for  he  is  now  a  compulsory  buyer; 
his  economic  status  is  fixed;  he  has  become  a  very  real  potential  force. 


CHAPTER  IV 


THE  RELATIONSHIP  BETWEEN  THE  BANKS  AND 
THE  STOCK  EXCHANGE 


CHAPTER  IV 

THE   RELATIONSHIP   BETWEEN  THE    BANKS   AND 
THE     STOCK     EXCHANGE 

"A  MILLION  in  the  hands  of  a  single  banker  is  a 
great  power,"  said  Walter  Bagehot;  "he  can  at 
once  lend  it  where  he  will,  and  borrowers  can 
come  to  him  because  they  know  or  believe  that  he 
has  it.  But  the  same  sum  scattered  in  tens  and 
fifties  through  a  whole  nation  is  no  power  at  all; 
no  one  knows  where  to  find  it  or  whom  to  ask  for 
it."  This  explains  the  power  of  Wall  Street. 
Money  flows  there  for  the  same  reason  that  water 
flows  downhill.  The  great  agricultural  districts 
of  the  West,  for  example,  will  gather  from  their 
crops  this  year  several  hundred  millions  of  dollars. 
They  have  no  real  economic  use  for  all  this  money 
in  the  farming  districts;  the  large  commercial  and 
industrial  undertakings  that  help  to  make  America 
rich  and  powerful  are  not  in  that  neighborhood. 
Particular  trades  settle  in  particular  districts, 
and  the  money  they  require  must  be  sent  to  them 
from  other  districts.  ''Commerce  is  curiously  con- 
servative in  its  homes;"  the  steel  trade  concen- 
99 


loo  THE  STOCK  EXCHANGE  FROM  WITHIN 

trates  in  and  around  Pittsburg,  the  grain  trade  at 
Chicago,  wholesale  merchants  in  special  lines  are 
always  to  be  found  huddled  together  in  our  big 
cities  in  neighborly  intimacy;  and  once  a  trade 
has  settled  in  one  spot  it  remains  there.  The 
millions  that  go  West  to  pay  the  farmer  must 
therefore  go  elsewhere  to  pay  others  as  fast  as 
a  demand  for  money  arises,  because  the  price 
that  will  be  paid  for  it  elsewhere  is  greater  than 
the  price  it  will  bring  in  the  farmer's  pockets. 
This  is  doubly  true  because,  as  we  have  said,  there 
are  no  imperious  demands  for  money  for  com- 
mercial undertakings  in  the  farmer's  neighbor- 
hood, and,  even  if  there  were,  home  enterprises 
are  seldom  attractive;  curiously  enough  there  is 
a  familiarity  about  them  and  their  local  promoters 
that  breeds  contempt.  Besides,  these  millions 
are  scattered  in  small  sums  all  over  the  agricul- 
tural States;  there  is  no  cohesion,  no  concentration. 
What  then  becomes  of  these  vast  sums."^  They 
are  deposited  in  the  local  banks,  and  the  local 
bankers,  who  are  wisely  permitted  by  law  to 
deposit  three  fifths  of  their  legal  reserves  in  a 
city  bank,  promptly  transfer  the  funds  that  are 
not  required  at  home  to  the  bank  that  will  pay 
interest  on  them.  In  this  way  large  capital 
accumulates,  and  when  we  say  this  is  a  wise 
provision    of   the    law   we    mean    that    scattered 


THE  BANKS  AND  STOCK  EXCHANGE     loi 

reserves  In  local  country  banks  are  of  no  more 
avail  in  emergencies  than  the  five-dollar  bills 
in  the  people's  pockets;  but,  gathered  into  one 
great  central  fund  that  will  aggregate  a  sum  large 
enough  to  provide  every  solvent  bank  and  business 
house  with  ample  support  in  times  of  distress, 
they  accomplish  a  purpose  worth  talking  about. 

This  is  tlie  way  they  do  in  Europe,  but  say 
"Central  Bank"  in  America,  and  people  are 
frightened  out  of  their  wits.  They  say  politics 
would  dominate  it;  "the  interests"  would  control 
it.  The  bigness  of  things  seems  to  paralyze  them. 
But  to  attack  a  thing  merely  because  it  is  big  and 
powerful  is  no  argument.  In  a  country  full  of  big 
things  it  does  not  ring  true;  it  is  un-American,  and, 
as  for  the  bogy  of  a  centralized  banking  control, 
there  is  Infinitely  more  of  It  in  New  York  to-day, 
under  the  existing  system,  than  there  could 
possibly  be  under  the  plan  proposed  by  the 
original  Aldrich  measure.  However,  the  idea  of 
a  great  Central  Bank  is  not  the  subject  under 
discussion. 

When  money  flows  into  the  New  York  banks 
the  popular  notion  seems  to  be  that  It  is  used  to 
facilitate  speculation  on  the  Stock  Exchange. 
But  this  is  only  one  of  Its  many  sources  of  employ- 
ment. It  will  supply  the  payroll  at  Pittsburg, 
it  will  ship  grain  to  Europe,  it  will  discount  the 


I02  THE  STOCK  EXCHANGE  FROM  WITHIN 

bills  of  merchants,  it  will  return  to  the  West  and 
South  when  they  call  for  it  to  move  the  next  crop. 
If  Canada  or  Europe  wants  it,  and  bids  high 
enough  for  it,  they  will  get  a  share  of  it.  Wherever 
capital  is  most  profitable,  there  it  will  turn;  it 
will  rapidly  leave  any  country  that  cannot  pay 
for  it.  It  is  the  old  simile  of  water  finding  its 
own  level.  The  first  step  consists  iTi  gathering 
the  idle  hoards  of  individuals  into  banks;  the  next 
consists  in  centralizing  these  deposits  where  they 
will  be  available  for  other  sections  of  the  country 
that  have  use  for  them. 

In  order  to  attract  these  funds  and  so  facilitate 
the  business  of  the  country  smoothly  and  eco- 
nomically, the  New  York  banks  are  accustomed  to 
paying  2  per  cent,  interest  on  such  deposits. 
Critics  who  seem  to  feel  that  there  is  something 
objectionable  in  the  laws  of  gravitation,  would 
prevent  country  banks  from  depositing  in  the 
cities  by  forbidding  the  payment  of  interest  on 
deposits  by  national  banks.  But  the  laws  that 
govern  national  banks,  as  Mr.  Horace  White 
suggests,  are  not  the  laws  that  govern  State  banks 
and  trust  companies,  and,  as  these  would  gladly 
pay  the  2  per  cent,  interest  on  deposits,  they  would 
be  given  an  unfair  advantage.*     Critics  also  say 

*  "  The  Stock  Exchange  and  the  Money  Market,"  by  Horace  White, 
"Annals  of  the  American  Society  of  Political  and  Social  Science,"  Vol. 
XXXVI,  No.  3,  Nov.,  1910,  pp.  563-573. 


BANKS  AND  THE  STOCK  EXCHANGE       103 

that  country  banks  should  not  be  allowed  to  keep 
three  fifths  of  their  reserves  in  city  banks,  but 
then  they  would  be  at  a  disadvantage  with  the 
State  banks  in  their  neighborhood,  since  the 
prohibition  would  not  apply  to  them.  Moreover, 
if  country  banks  were  not  thus  permitted  to  de- 
posit three  fifths  of  their  reserves,  what  would 
they  do  with  their  funds?  For  long  periods  the 
money  would  remain  idle,  and  idle  funds  are  as 
unhealthy  for  the  community  as  they  are  for  the 
banks. 

There  is  no  other  way  but  for  the  country 
banker  to  take  care  of  his  customers  first,  and  then 
send  as  much  of  his  surplus  as  the  law  permits 
to  the  centre  that  will  pay  him  the  best  return 
and  the  safest  return.  This  is  good  business; 
it  makes  money;  it  is  sound  economics.  And 
before  the  critic  goes  into  a  paroxysm  over  the 
fear  that  speculation  in  stocks  will  absorb  all  this 
wealth  once  it  finds  its  way  to  New  York,  let  me 
remind  him,  to  cite  but  one  instance,  that  short- 
time  commercial  paper,  representing  actual  com- 
modities moving  to  market,  has  the  first  call. 
The  Minneapolis  miller's  ninety-day  bill,  accepted 
by  a  reliable  merchant  and  based  on  an  actual 
carload  of  flour,  has  in  all  normal  times  a  preferred 
claim  on  the  banker's  funds. 

This   discounting   of  commercial   paper  is   the 


104  THE  STOCK  EXCHANGE  FROM  WITHIN 

ideal  function  of  banking,  to  quote  Mr.  White, 
and  if  there  were  always  a  sufficient  supply  of  good 
bills  to  absorb  all  the  bank's  loanable  credit,  with 
an  inflow  of  cash  from  maturing  bills  equal  to 
the  outgo  of  new  ones,  there  would  be  no  occasion 
for  bankers  to  look  elsewhere  to  keep  their  funds 
mobile  —  and  the  critic  would  be  out  of  work.* 
But  this  does  not  often  happen,  because  the  bank's 
loanable  funds  normally  exceed  the  amount  of 
acceptable  paper,  and  at  such  times  the  banker 
makes  advances  on  goods  or  securities,  and,  if 
goods  and  securities  are  not  pressing  for  loans, 
he  will  place  his  funds  elsewhere,  where  a  demand 
exists.  But  securities  for  which  there  is  always  a 
ready  market  are  such  thoroughly  good  collateral 
for  loans  that  bankers  are  glad  to  get  them. 

The  stockbroker  is,  in  a  way,  a  dealer  in  mer- 
chandise. Whether  he  buys  for  investment  or 
for  speculation  —  and  remember  that  the  boun- 
dary line  between  investment  and  speculation  is 
often  shadowy  and  indistinct  —  he  pays  cash  for 
everything  he  buys.  He  then  seeks  advances 
of  credit  upon  his  wares  just  as  the  merchant  does, 
supplementing  his  own  capital  and  the  deposits 
(margins)  of  his  customers  with  call  or  time 
money  from  the  banks.  To  deny  him  these  facili- 
ties is  exactly  the  same  as  to  deny  credit  to  a  mer- 

*Ibid.,  p.  564. 


BANKS  AND  THE  STOCK  EXCHANGE     105 

chant;  both  are  doing  a  perfectly  legal  business, 
and  both  contribute  to  the  economic  welfare  of 
the  community. 

The  popular  idea  is  that  loanable  funds  thus 
borrowed  by  Stock  Exchange  houses  constitute 
a  diversion  of  money  from  the  merchants  who 
need  it.  Not  so.  Even  if  the  banks  were 
disposed  to  use  all  their  loanable  funds  in  mer- 
cantile loans  and  discounts  they  could  not  do  so, 
because  a  part  of  these  funds  may  be  called  for 
at  any  time,  and  it  is  not  good  banking  to  lend 
too  large  a  proportion  of  call  money  on  time.  The 
merchant  wants  30,  60,  and  90  day  money,  and 
he  wants  it  at  a  rate  not  to  exceed  6  per  cent.;  the 
stockbroker  is  compelled  by  the  nature  of  his 
business  to  borrow  a  large  part  of  his  money  on 
call,  and  he  pays  whatever  the  banks  choose  to 
charge  for  it.  Incidentally  it  may  be  said  that 
no  usury  law  is  violated,  even  if  100  per  cent,  is 
charged,  because  the  New  York  law  legalizes  any 
rate  of  interest  on  call  loans  of  ^5000  and  upward, 
secured  by  collateral.* 

*  The  Stock  Exchange  authorities  were  asked  by  the  Hughes  Commis- 
sioners in  1909  Vhat  effect  would  result  if  this  law  were  repealed.  An 
interesting  historical  summary  is  involved  in  the  reply  to  this  question. 

"In  our  opinion  the  repeal  of  such  a  law  would  simply  lead  to  constant 
evasions,  which  would  cause  the  law  to  be  practically  a  dead  letter,  and  it 
is  far  better  to  leave  it  as  it  is,  and  to  allow  the  supply  and  demand  to 
regulate  the  rate  for  money. 

"It  is  reasonable  to  assume  that  the  repeal  of  this  law  would  result  in  a 
recurrence  of  the  conditions  which  existed  prior  to  its  enactment.  Prior 
to  1882,  when  this  Act  was  passed,  such  loans  were  subject  to  the  drastic 


io6  THE  STOCK  EXCHANGE  FROM  WITHIN 

As  a  matter  of  fact,  far  from  being  put  at  a 
disadvantage  by  the  banking  methods  that 
provide  call  loans  to  Stock  Exchange  houses,  the 
merchant  or  manufacturer  enjoys  banking  facili- 
ties which  the  Stock  Exchange  may  never  hope 
to  enjoy.  The  merchant  is  able  to  secure  banking 
accommodations  upon  his  personal  credit,  that  is, 
by  discounting  his  own  promissory  notes  or 
single-name  paper  unsecured  by  pledge  of  collat- 
eral. But  the  stockbroker,  however  ample  his 
resources  and  his  credit,  can  only  obtain  loans 
upon  collateral  securities.  Any  attempt  to  resort 
to  his  personal  credit  or  his  personal  paper  would 
be  construed  as  a  confession  of  weakness,  and  his 
good  name  at  the  banks  would  suffer  accordingly. 

Persons  who  conjure  nightmares  over  the  prac- 


provisions  of  the  Usury  Law,  which  imposes  the  forfeiture  of  the  principal 
as  a  penalty  for  violation.  The  Usury  Law,  however,  as  to  this  class  of 
loans,  had  for  years  been  a  dead  letter,  and  whatever  risks  were  incurred 
through  its  penalties  were  taken  by  lenders  without  hesitation.  Demand 
loans  were  made  at  interest  plus  a  commission,  and  in  times  of  money 
stringency  the  interest  rate  represented  by  the  so-called  commission  attained 
proportions  which  have  been  unknown  since  the  passage  of  the  Act  of 
1882.  Extreme  instances  are  to  be  found  of  a  rate  as  high  as  700  per  cent. 
per  annum. 

"Such  violent  fluctuations  in  the  rate  have  been  unknown  since  the 
passage  of  the  Act  of  18O2.  Since  that  time  all  quotations  of  interest  on 
call  loans  have  been  at  so  much  per  cent,  per  annum,  not,  as  was  formerly 
the  case,  at  |  or  j  of  I  per  cent,  per  day.  Through  the  extreme  stringency 
which  existed  in  the  autumn  of  1907,  the  rate  ran  from  12  to  30  per  cent., 
with  the  exception,  perhaps,  of  one  or  two  days  when  practically  no  money 
was  procurable  at  any  price,  when  the  quotation  ran  up  to  100  or  no  p)er 
cent,  per  annum.  It  would  seem  demonstrated  by  experience  that  the 
law  of  1882  has  been  a  most  potent  factor  in  reducing  the  interest  rate  in 
times  of  stringency  and  in  rendering  it  at  all  times  more  stable  and  equable." 


BANKS  AND  THE  STOCK  EXCHANGE     107 

tice  of  the  banks  in  loaning  surplus  funds  to  stock- 
brokers are  deceiving  themselves.  Instead  of 
losing  by  this  system,  every  merchant  and  manu- 
facturer In  the  land  profits  by  it  in  greater  or  less 
degree.  The  stockbroker  deals  in  the  bonds  and 
shares  of  great  railway  and  industrial  companies, 
which,  In  order  to  succeed,  must  be  able  to  sell 
their  certificates  to  the  public  and  so  raise  the 
money  necessary  to  provide  the  extensions  and 
new  construction  that  are  constantly  demanded  by 
the  public.  If  fresh  capital  could  not  be  enlisted 
In  this  way,  additions  and  Improvements  would 
cease.  The  merchant  who  requires  the  railroads 
to  ship  his  goods,  and  the  manufacturer  whose 
demands  for  new  side-tracks,  cars,  and  other 
equipment  are  unceasing,  are  therefore  directly 
interested  in  the  maintenance  of  a  broad  and 
stable  speculative  market  for  securities  at  all 
times,  because  In  that  way  only  are  funds  to  be 
raised  for  the  requirements  of  trade  and  industry. 
There  would  have  been  no  railroads  In  this  country 
had  there  not  been  speculators  to  build  them, 
nor  could  the  money  have  been  raised  had  there 
not  been  other  speculators  to  buy  the  shares  with 
the  aid  of  the  banks. 

Prevent  the  banks  from  lending  money  to 
facilitate  stock-market  operations  and  business 
ceases;  Interfere  with  It  or  hamper  It  and  confidence 


io8  THE  STOCK  EXCHANGE  FROM  WITHIN 

is  Impaired,  and  when  these  things  happen  the 
industrial  system  collapses  in  terror.  Such  has 
been  the  experience  of  modern  times.  Until  a 
system  is  devised  whereby  large  undertakings  may 
enlist  public  support  in  other  ways  than  by  offering 
securities  in  our  great  Exchanges  and  by  main- 
taining a  market  for  them  there,  it  is  useless  to 
talk  of  interfering  with  that  necessary  relationship 
which  exists  between  the  banks  and  the  stock 
market.  On  the  one  hand  we  have  the  cobwebs 
and  windy  sophistries  of  politicians  and  doctrin- 
aires; on  the  other  hand  the  test  of  proved  effec- 
tiveness in  the  conduct  of  business.  And  the 
country's  business  cannot  stop;  it  must  go  ahead. 
In  the  last  six  years  more  than  a  billion  shares 
of  stock  have  changed  hands  on  the  New  York 
Stock  Exchange,  together  with  bonds  of  a  market 
valuation  exceeding  five  billions  of  dollars,  and, 
under  the  rules,  each  purchase  made  was  paid 
for  in  full  by  2:15  p.m.  of  the  day  following  the 
transaction.  If  all  these  purchases  had  been  made 
for  cash  —  i.  e.,  if  every  customer  of  every  broker- 
age house  paid  in  full  for  his  purchases,  there  would 
be  no  use  for  bank  loans  to  brokers;  there  would  be 
no  speculation,  and  hence  no  progress.  Securities 
purchased  In  the  six-year  period  quoted  were,  in 
the  majority  of  instances,  bought  on  margin,  that 
is,  they  were  only  partially  paid  for  by  the  pur- 


BANKS  AND  THE  STOCK  EXCHANGE     109 

chasers,  the  balance  required  being  funished  by  the 
broker  from  his  capital  and  by  the  banks  from 
their  loanable  funds. 

There  is  a  popular  fallacy  as  to  the  amount  of 
actual  cash  required  to  finance  these  enormous 
Stock  Exchange  transactions;  persons  who  are  not 
well  informed  often  entertain  the  impression  that 
it  is  much  larger  than  it  really  is.  As  a  matter 
of  fact  considerably  more  than  90  per  cent,  of 
the  business  of  the  banks  is  done  through  the 
Clearing  House,  an  institution  designed,  as  every 
one  knows,  to  minimize  the  transfer  of  actual  cash 
and  to  simplify  the  payment  of  balances.  If 
these  clearings  seem  large  —  they  are,  in  fact, 
twice  as  large  in  New  York  as  in  all  the  other 
cities  of  the  Union  added  together  —  it  is  not 
alone  because  more  speculation  in  securities  takes 
place  in  New  York,  but  because  this  happens  to 
be  the  centre  where  many  other  cities  balance 
their  claims  against  each  other. 

Furthermore,  when  critics  who  do  not  under- 
stand the  subject  look  askance  at  the  volume  of 
loans  of  the  New  York  banks,  thev  must  remember 
that  the  lending  power  of  such  institutions  is 
always  four  times  greater  than  the  supply  of  money 
in  its  vaults.  The  reserve  of  25  per  cent,  which  the 
banks  are  required  to  maintain  means  that  every 
million  dollars  of  actual  cash  added  to  their  funds 


no  THE  STOCK  EXCHANGE  FROM  WITHIN 

renders  possible  an  expansion  of  four  million  in 
loans,  and  every  withdrawal  of  funds  involves 
a  proportionate  reduction  of  these  loans.  These 
matters  are  self-evident.  The  point  to  bear  in 
mind  is  that  through  this  expansion  and  contrac- 
tion of  loans  stock-market  operations  are  increased 
or  diminished  by  almost  automatic  processes. 
"Money  talks"  is  an  old  aphorism.  In  this  case 
it  is  not  money  that  talks,  but  credit,  and  the 
credit  extended  to  stockbrokers  by  the  banks  is 
always  wisely  regulated  to  meet  conditions  as 
they  arise. 

The  customer  of  a  brokerage  house,  buys,  let 
us  say,  looo  shares  of  St.  Paul  at  120,  on  which  he 
deposits  a  partial  payment  or  margin  of  ^15,000. 
The  bank  will  loan  to  the  broker  80  per  cent,  of 
the  market  value  of  the  stock,  or  ^96,000,  which, 
added  to  the  ^15,00x3  deposited  by  the  customer, 
leaves  ^9000  which  the  broker  supplies  from  his 
firm's  capital.  The  broker  gives  to  the  bank, 
with  the  securities,  a  note  on  one  of  the  bank's 
printed  forms,  which  gives  the  bank  absolute 
authority  to  sell  the  collateral  whenever  the 
margin  shall  have  declined  to  less  than  20  per  cent. 
This  note  is  so  sweeping  in  its  terms,  and  gives 
the  bank  such  complete  power,  that  a  reproduction 
of  it,  in  small  type,  would  fill  two  pages  of  this 
book. 


BANKS  AND  THE  STOCK  EXCHANGE     iii 

It  empowers  the  bank  to  sell  as  it  pleases  — 
if  the  broker,  fails  to  pay  the  loan  on  demand,  or 
to  keep  the  margin  at  20  per  cent.  —  all  the 
securities  in  the  loan;  it  authorizes  the  bank  to 
seize  any  deposit  the  broker  may  have  in  the 
institution;  the  bank  may  itself  purchase  all  or 
any  part  of  the  securities  thus  sold,  and  all  right 
of  redemption  by  the  broker  is  waived  and  re- 
leased. This  instrument  would  seem,  per  se,  a 
pretty  strong  hold  on  the  broker,  but  the  bank's 
security  does  not  end  there.  In  making  the  loan 
the  bank  knows  that  the  borrower  is  a  member 
of  the  Neiv  York  Stock  Exchange,  and  that 
presupposes  capital,  with  at  least  one  Stock 
Exchange  membership,  worth  to-day  about  $60,- 
000.  It  knows,  too,  that  a  fundamental  rule 
of  all  Stock  Exchange  brokers  is  to  protect  the 
bank  at  all  hazards,  not  merely  because  the 
personal  honor  of  the  broker  is  involved,  but 
because  the  business  could  not  be  conducted 
otherwise. 

It  is  apparent  from  a  consideration  of  all  these 
elaborate  precautions  that  the  lending  of  funds  to 
stockbrokers  is  a  safe  business,  indeed  in  all  the 
criticism  directed  against  Wall  Street  methods  I 
have  not  yet  heard  it  questioned.  The  depart- 
ment of  the  bank  entrusted  with  such  matters 
watches  the  tape  with  vigilance  to  see  that  the 


112  THE  STOCK  EXCHANGE  FROM  WITHIN 

20  percent,  margin  is  not  impaired;  if  it  should 
happen  to  be  impaired,  the  broker's  messenger  is 
almost  always  on  hand  anticipating  with  his 
additional  collateral  the  call  that  the  banker 
will  make.  So  excellent  is  Stock  Exchange 
collateral,  thus  secured  and  thus  protected,  that 
the  losses  resulting  from  this  class  of  business  are 
infinitesimal.  I  am  not  a  banker,  but  I  hazard 
the  opinion  that  it  constitutes,  in  fact,  the  mini- 
mum risk  in  all  the  departments  of  the  bank's 
business. 

In  any  case,  when  trouble  comes  and  panic 
conditions  prevail,  it  requires  no  stretch  of  the 
imagination  to  say  that  the  stockbroker's  loan  is 
a  better  loan  than  that  of,  let  us  say,  the  silk 
merchant,  for  he,  perhaps,  cannot  easily  repay. 
He  is  under  immense  liabilities  in  various  direc- 
tions and  he  has  many  obligations;  whereas  the 
stockbroker  feels  every  minute  of  the  day  that 
his  first  duty  is  to  the  bank;  the  customer  who 
owns  the  securities  in  the  loan  must  either  deposit 
sufficient  margin  or  the  broker  will  sell  him  out, 
in  which  case  the  loan  at  the  bank  is  paid  off. 
Finally,  it  may  be  added  that  in  the  October  panic 
of  1907,  when  merchants'  failures  were  announced 
daily,  and  when  certain  banks  and  trust  com- 
panies closed  their  doors,  not  a  single  failure  was 
announced  on  the  New  York  Stock  Exchange. 


BANKS  AND  THE  STOCK  EXCHANGE    113 

Another  objection  often  lodged  by  critics  of 
present-day  banking  conditions,  has  to  do  with 
the  practice  of  New  York  banks  in  the  over- 
certification  of  brokers'  checks.  These  over- 
certifications  are  held  to  be  objectionable  because 
the  National  Banks  are  forbidden  by  law  to 
certify  for  a  sum  greater  than  the  drawer  has 
on  deposit.  In  practice  it  works  out  this  way: 
The  broker's  clearing-house  sheet  of  to-day  tells 
him  what  payments  he  has  to  make,  so  on  the 
following  morning  he  acquaints  his  bank  with  the 
fact  that  payments  are  to  be  made  necessitating 
certifications  beyond  the  amount  of  his  deposit. 
He  then  sends  to  the  bank  the  promissory  note 
of  his  firm,  payable  on  demand,  and  the  bank 
credits  his  account  with  the  proceeds.  As  the 
day  advances  the  broker's  checks  come  in  and 
are  credited  to  the  account,  which  is  always 
balanced  and  the  note  paid  off  before  the  close  of 
the  day's  business.     The  risk  is  nominal. 

Of  course  a  few  hours  elapse  between  the 
certification  and  the  receipt  of  the  broker's 
checks,  and  in  this  brief  interval  it  would  be 
possible  for  a  dishonest  man  to  abuse  the  privilege 
extended  him,  but  the  fact  that  such  a  thing  does 
not  happen  affords  tenable  ground  for  the  belief 
that  it  will  not  happen.  The  bank  does  not  deal 
with  an  individual,  but  with  a  firm,  and  it  knows 


114  THE  STOCK  EXCHANGE  FROM  WITHIN 

that  the  firm  has  a  membership  in  the  Stock 
Exchange,  with  a  cash  balance  on  deposit  in 
the  bank  that  extends  the  accommodation.  Any 
banker  will  bear  witness  that  the  business  is 
quite  satisfactory  and  that  it  involves  no  loss. 
Moreover,  this  certification  of  stockbrokers' 
checks  is  essential  to  the  maintenance  of  broad 
speculative  markets,  and,  whether  that  portion  of 
the  public  that  criticises  the  practice  likes  it  or 
not,  speculation  is  a  necessary  part  of  our  business 
life. 

It  may  be  pertinent  to  remark  in  this  connec- 
tion that  the  law  prohibiting  these  certifications 
by  National  Banks  is  unnecessary  and  unwise, 
as  is  evidenced  by  the  facility  and  safety  with 
which  it  is  honored  in  the  breach.  State  Banks 
in  New  York  are  under  no  such  restriction,  nor 
has  it  occurred  to  our  lawmakers  that  a  neces- 
sity for  the  prohibition  exists.  The  experience 
of  these  banks  in  the  matter  of  certifications, 
like  that  of  the  National  Banks,  shows  that  the 
business  is  safe  and  sound.  If  the  merchant 
discounts  his  paper  for  thirty,  sixty,  or  ninety 
days,  why  prevent  a  similar  accommodation  to 
stockbrokers  for  an  hour  or  two.''  Both  are 
engaged  in  a  strictly  legitimate  business  upon 
which  the  welfare  of  the  community  in  greater 
or    less    degree    depends,    and    the    fundamental 


BANKS  AND  THE  STOCK  EXCHANGE     115 

purpose  of  a  bank  is  to  promote  and  encourage 
such  business.  That  is  what  banks  are  for,  and 
bank  officers  are  supposed  to  know  something 
about  how,  when,  and  where  accommodations 
may  be  extended  with  safety  to  all  concerned. 

Mr.  Horace  White  cites  the  year  1909  as  an 
illustration  of  the  employment  of  loanable  bank 
funds  by  brokers  which  brings  up  another  point. 
For  long  periods  in  that  year,  money  loaned  on 
call  on  the  floor  of  the  New  York  Stock  Exchange 
at  i|  per  cent.,  while  our  banks  were  paying 
2  per  cent,  to  the  interior  banks  to  which  the 
money  belonged.  This  does  not  necessarily  mean 
that  the  banks  were  losing  money;  because  the 
greater  part  of  these  funds  was  employed  in 
time  loans  and  in  commercial  discounts  at  3  and 
4  per  cent.,  thus  raising  the  average  income  rate. 
There  is  also  to  be  considered  the  unearned 
increment  which  the  bank  gains  by  "holding" 
its  depositor,  even  though  no  large  profit  accrues 
from  the  funds  thus  deposited.* 

As  the  ratio  of  reserves  to  liabilities  at  that 
time  was  much  above  the  legal  requirement,  it 
might  be  inferred  from  this  and  from  the  l^ 
per  cent,  rate  that  money  was  easy;  but  it 
was  not,  as  many  persons  in  commercial  pur- 
suits   learned    when   they    tried     to  borrow     it. 

*Cf.  Mr.  White's  article  supra,  p.  570. 


ii6  THE  STOCK  EXCHANGE  FROM  WITHIN 

There  was  a  great  deal  of  money  that  was  not 
being  used  In  daily  business,  and  one  of  the 
reasons  was  that  the  period  was  one  of  distrust. 
Stockbrokers  got  funds  at  i|  per  cent,  while 
many  other  borrowers  were  required  to  pay 
stiffer  rates,  because  the  banks  that  controlled 
the  money  market  —  i.  e.,  the  loanable  funds  — 
were  unwilling  to  part  with  them  except  for  short 
periods  and  on  instantly  marketable  security,  and 
this  state  of  mind  on  the  part  of  the  New  York 
bankers  was  shared  by  the  bankers  of  Europe. 
It  was  good  banking,  because  it  was  prudent  and 
conservative.  In  other  words,  at  a  time  when 
danger  threatened,  bankers  in  all  important 
centres  of  the  world  regarded  Stock  Exchange 
collateral  as  ideal  security,  and,  as  we  have  seen, 
the  aggregate  of  their  loanable  funds  pressing  on 
the  market  kept  call  rates  down  to  i|.  If  in 
times  of  doubt  and  distrust  this  form  of  collateral 
proves  its  safety,  is  it  not  a  fair  hypothesis  that 
it  is  safe  at  all  times .'' 

If  the  critics  are  correct  in  their  contention  that 
pressure  of  easy  money  in  the  New  York  market 
holds  out  inducements  for  foolhardy  speculation 
on  the  Stock  Exchange,  the  year  1909,  just  cited, 
should  have  witnessed  a  great  boom  in  securities. 
If  speculators  could  borrow  at  l§  per  cent,  on 
securities  that  netted  5  and  6  per  cent.,  the  theory 


BANKS  AND  THE  STOCK  EXCHANGE     117 

of  our  adversaries  is  that  this  disproportion  entices 
a  large  number  of  people  into  such  speculative 
ventures  that  inflation  takes  place,  followed  by 
collapse.  That  nothing  of  the  sort  occurred  shows 
that  critics,  like  other  less  gifted  persons,  may  err; 
it  shows,  too,  what  every  thoughtful  person 
knows,  that  booms  are  not  created  on  the  Stock 
Exchange,  which  merely  reflects  in  its  dealings 
external  conditions  of  all  sorts,  among  them 
psychological  processes  which  neither  brokers 
nor  money  markets  may  hope  to  control.  As  a 
matter  of  record,  1909  showed  but  little  increase 
In  the  volume  of  business  transacted  on  the 
Stock  Exchange  as  compared  with  1908,  and  the 
increase,  such  as  it  was,  represented  nothing  more 
than  a  natural  recovery  from  the  paralysis  follow- 
ing the  debacle  of  1907,  plus  an  investment  of 
funds  at  attractive  levels.  The  same  state  of 
affairs  prevailed  In  1910.  From  June  to  December 
of  that  year  call  money  rates  almost  never 
exceeded  3  per  cent.,  and  time  money  might  be 
had  at  from  3I  to  5,  yet  far  from  stimulating 
speculation  ■ —  far  from  revealing  an  excessive 
employment  of  bank  funds  by  stockbrokers  — 
transactions  both  in  shares  and  bonds  dwindled  to 
insignificant  proportions. 

Cheap  money  Is  by  no  means  a  "bull  argument" 
from  the  Stock  Exchange  point  of  view,  because 


ii8  THE  STOCK  EXCHANGE  FROM  WITHIN 

it  arises  from  dull  conditions  in  commerce  and 
industry,  and  there  can  be  no  boom  in  the  securi- 
ties which  represent  the  nation's  business  unless 
mills  and  factories  and  railroads  are  prosperous. 
There  have  been  more  bull  markets  with  tight 
money,  or  with  money  in  the  neighborhood  of 
6  per  cent.,  than  in  cheap  money  markets  of  the 
sort  just  described.  This  is  not  equivalent  to 
saying  that  a  prolonged  rise  can  be  conducted 
through  a  period  of  dear  money.  As  a  matter  of 
Stock  Exchange  experience  such  a  condition 
seldom  arises,  because  the  Stock  Exchange  dis- 
counts the  future,  foresees  those  economic  con- 
ditions that  spell  prosperity  for  the  country,  and 
advances  the  prices  of  securities  on  a  money  mar- 
ket that  has  not  yet  felt  the  demands  of  improved 
conditions. 

In  June,  July,  and  August,  for  example,  con- 
ditions may  warrant  a  hope  of  bountiful  harvests, 
while  general  business  is  dull  and  idle  money 
abundant.  Such  a  prospect  is  always  discounted, 
other  things  being  equal,  by  a  rise  in  securities, 
and  money  that  is  not  yet  required  to  market 
the  crops  thus  finds  employment  as  loans  on 
Stock  Exchange  collateral.  Later  on,  when 
reviving  business  leads  the  interior  banks  to  call 
their  New  York  balances,  the  depository  banks 
meet  the  demand  by  calling  loans  and  by  advanc- 


BANKS  AND  THE  STOCK  EXCHANGE     119 

ing  rates.  The  speculative  movement  on  'Change 
is  then  checked  or  reversed  just  in  proportion  to 
the  demand  for  money  elsewhere.  It  may  con- 
tinue for  a  while  if  the  discounting  process  has 
not  been  complete,  or  if  there  remains  a  wide 
disparity  between  interest  rates  for  money  and 
net  returns  on  securities;  or  if  the  independent 
resources  of  the  city  banks  are  large  enough  to 
furnish  comfortable  interest  rates  even  after  the 
westward  drain  has  commenced,  but,  generally 
speaking,  "the  move  is  over,"  to  quote  the 
vernacular,  by  the  time  business  men  want  their 
money.  Nine  times  out  of  ten  any  monetary 
strain  that  results  thereafter  is  not  due  to  specula- 
tive operations  in  securities  nor  to  any  other 
cause  attributable  to  the  Stock  Exchange. 

A  word  should  be  said  here  concerning  the 
Stock  Exchange  Clearing  House,  because  just  as 
the  Clearing  House  of  the  associated  banks 
ascertains  and  pays  the  balances  of  its  members 
with  a  minimum  outlay  of  coin  and  legal  tender 
•notes  and  with  great  economy  of  time  and  labor, 
so  the  Stock  Exchange  Clearing  House  stands 
the  strain  of  an  enormous  business,  reduces  the 
volume  of  checks  and  deliveries,  and  relieves 
both  the  banks  and  the  stockbrokers  of  an  amount 
of  risk  and  confusion  that  would  be  well-nigh 
intolerable. 


I20  THE  STOCK  EXCHANGE  FROM  WITHIN 

In  order  that  the  layman,  for  whom  these  pages 
are  written,  may  understand  what  this  means, 
it  may  be  said  that  if  500,000  shares  of  stock 
are  sold  in  a  day  on  the  Stock  Exchange,  and  if 
we  assume  the  average  price  of  these  stocks 
to  be  50,  the  checks  paid  out  on  that  day  would 
be  ^25,000,000,  and  in  a  year  at  that  rate  certi- 
fications would  be  necessary  involving  the  stupen- 
dous total  of  ^7,500,000,000.  This  clumsy  if  not 
impossible  method  the  Clearing  House  was 
designed  to  avoid.  Moreover,  the  actual  daily 
transfer  of  such  a  volume  of  securities  is  largely 
obviated  by  the  Clearing  House  system,  and  thus 
another  and  highly  important  economy  is  effected. 

The  Stock  Exchange  Clearing  House  is  managed 
by  a  committee  of  five  members  of  the  Board  of 
Governors  of  the  Exchange.  Each  day  the 
seller  of  stocks  sends  to  the  office  of  the  buyer 
his  "deliver"  ticket,  and  the  buyer  sends  to  the 
seller  his  "receive"  ticket,  this  transaction  con- 
stituting a  "comparison"  by  both  parties,  and 
an  evidence  that  the  transaction  has  been  entered 
on  their  books.  Before  7  p.m.  of  that  day  these 
tickets,  and  the  sheet  comprising  the  record,  are 
sent  to  the  Clearing  House.  This  sheet  contains 
a  "receive"  and  "deliver"  column,  with  all  the 
transactions  in  each  security  grouped  together, 
and   with    a   balance  —  i.    e.,    a   debit   or   credit. 


BANKS  AND  THE  STOCK  EXCHANGE     121 

struck  at  the  bottom.  If  there  is  a  credit,  a  draft 
on  the  Clearing  House  bank  is  attached;  if  a  debit, 
a  check  for  the  balance  accompanies  the  sheet. 

When  the  Clearing  House  receives  this  sheet 
a  simple  and  a  very  ingenious  process  ensues 
which  relieves  the  broker  of  a  great  deal  of  trouble, 
risk,  and  labor.  If  he  has  bought  and  sold,  let 
us  say,  an  equal  amount  of  stock,  comprising 
numerous  transactions,  instead  of  having  to 
draw  checks  for  all  these  separate  trades,  the 
Clearing  House  settles  the  whole  day's  transac- 
tions by  a  single  check  for  the  actual  balance.  If 
his  numerous  purchases  and  sales  do  not  balance, 
and  if  there  are  various  lots  of  stock  to  receive  and 
deliver,  the  Clearing  House  eliminates  a  host  of 
intermediaries  and  puts  him  into  direct  touch 
with  one  firm  to  whom  he  delivers,  and  with  one 
from  whom  he  receives.  He  may  have  had  no 
transaction  with  the  firms  thus  arbitrarily  assigned 
to  him;  that  makes  no  diflFerence.  The  books  of 
the  Clearing  House  always  balance;  somewhere 
a  firm  is  entitled  to  a  receipt  of  stock,  and  some- 
where another  firm  will  be  found  to  deliver  it  to 
him. 

Nothing  could  be  simpler  and  more  economical 
than  the  manner  in  which  the  two  are  brought 
together.  In  such  a  system,  the  number  of 
shares  actually  delivered  is  reduced  by  the  Clear- 


122  THE  STOCK  EXCHANGE  FROM  WITHIN 

ing  House  to  one  third  of  the  number  represented 
by  the  broker's  actual  transactions,  while  the 
amount  of  money  which  he  must  command  to 
meet  his  daily  engagements  represents,  on  an 
average,  only  25  per  cent,  of  the  actual  capital 
that  would  be  required  were  it  not  for  the  excellent 
system  thus  afforded  him.  Persons  who  wonder 
at  the  magnitude  of  Stock  Exchange  transactions, 
and  who  jump  to  hasty  conclusions  as  to  the 
actual  capital  Involved,  may  well  reflect  upon  the 
manner  in  which  this  method  reduces  to  a  mini- 
mum the  stockbroker's  drafts  upon  the  banks. 

In  a  larger  sense,  if  the  critic  in  these  matters 
affecting  the  relationship  of  banks  to  stockbrokers 
feels  aggrieved  at  what  he  thinks  is  an  improper 
diversion  of  funds,  he  must  remember  that  the 
comparative  scarcity  of  capital  to-day  —  which  Is 
at  the  bottom  of  his  complaint  —  Is  not  due  in 
any  sense  to  Stock  Exchange  speculation,  for 
there  has  been  almost  no  extensive  speculation 
in  this  quarter  from  1907  down  to  November,  1912. 
To  find  the  cause  of  the  scarcity  of  capital  —  and 
it  is  unquestionably  scarce  —  he  must  consider 
the  immense  destruction  of  tangible  wealth  in  the 
last  decade,  and  the  extraordinary  tendency  to 
convert  floating  forms  of  capital  into  fixed  and 
immobile  forms. 

The    amount    of    money    expended    in    State 


BANKS  AND  THE  STOCK  EXCHANGE    123 

roads  since  automobiles  came  into  popularity 
is  probably  ten  times  more  than  it  was  before; 
at  the  election  in  November,  191 2,  a  fresh  total 
of  ^50,000,000  was  voted  for  "good  roads"  by 
the  electorate  in  New  York  State.  The  build- 
ing of  the  Panama  Canal  has  cost  or  will  cost 
about  ^365,000,000;  all  over  the  country  large 
municipal  or  state  works  are  under  construction; 
here  in  New  York  the  contract  for  the  Erie  Canal 
calls  for  $150,000,000,  and  for  the  city's  new 
water-supply  system  —  the  Ashokan  basin  and 
the  Kensico  reservoir — $177,000,000,  each  con- 
tributing a  share  to  the  depletion  of  the  normal 
supply  of  working  capital.  Meantime,  to  cite 
another  instance.  Congress  appropriates  $160,000,- 
000  to  pensions  in  a  single  year,  and  $40,000,000, 
as  a  recent  writer  puts  it,  "for  that  particular 
form  of  graft  which  consists  in  giving  a  $30,000 
post  office  to  a  thirty-cent  village."  The  railroads 
of  the  country  alone  require  to-day  sums  of  money 
equivalent  to  the  working  capital  represented  by 
all  our  bountiful  harvests  of  191 2. 

Aside  from  these  matters  the  critic  should 
remember,  in  fair  play,  that  the  currency  famines 
which  occur  with  periodic  frequency  in  our  country 
are  due  in  large  measure  to  the  non-elastic  nature 
of  the  currency,  to  its  persistent  absorption  by 
the  Treasury,  and  to  the  rigid  restrictions  which 


124  THE  STOCK  EXCHANGE  FROM  WITHIN 

these  abnormalities  impose  on  the  volume  of 
banking  credit.  Conditions  such  as  these  contrib- 
uted in  no  small  measure  to  our  last  great  panic, 
and  led  to  a  premium  on  currency  that  made  us 
a  laughing-stock  among  the  nations.  There  has 
been  no  such  money  delirium  in  England  since 
the  Napoleonic  wars;  no  such  condition  in  Ger- 
many since  the  empire  was  founded,  and  nothing 
approaching  it  in  France,  even  in  the  commune 
and  the  war  with  Prussia.  Yet  in  America 
we  go  on  wobbling  uncertainly  under  the  make- 
shift act  of  1908,  with  its  currency  associations 
and  its  emergency  measures,  and  with  the  added 
fear  of  what  may  come  when  the  Act  expires  in 
1914. 

The  situation  in  America  is  substantially  this: 
Business  drives  ahead  at  a  tremendous  pace,  with 
perils  on  every  side,  chiefly  anxious  to  be  undis- 
turbed. Matters  run  along  smoothly  for  a  while; 
then  something  happens  —  there  is  too  much 
optimism  or  too  much  confidence  —  and  a  smash. 
It  is  not  due  to  speculation  in  securities,  because, 
as  in  1907,  the  stock  markets  are  the  first  to  see 
what  is  coming  and  to  discount  it.  But  specu- 
lation in  lands,  or  in  manufacture,  or  in  railroad 
construction  go  on  and  on;  there  is  too  much 
work  for  the  dollar  to  do;  the  currency  system 
breaks  down;  here  and  there  a  financial  institution 


BANKS  AND  THE  STOCK  EXCHANGE     125 

closes  its  doors;  public  confidence  is  shattered,  and 
the  whole  credit  system  is  disturbed. 

Then  there  arises  a  noble  army  of  critics  who, 
with  the  best  intentions  but  with  insufficient 
knowledge  and  study,  set  to  work  to  remedy 
conditions  they  do  not  understand  by  methods 
untried  and  unpractical,  that  only  add  to  the 
general  confusion.  More  harm  than  good  results 
when  the  physician,  brusquely  entering  the  sick- 
room, tells  the  patient  he  is  a  very  sick  man, 
denounces  the  lobster  that  poisoned  him,  and 
departs  with  a  general  condemnation  of  shellfish, 
but  without  prescribing  suitable  remedies.  Per- 
sons who  denounce  the  relationship  existing 
between  banks  and  stockbrokers  are  in  most  in- 
stances upright  citizens  of  high  character,  but  un- 
til a  little  patient  study  of  conditions  has  enabled 
them  to  speak  with  authority  upon  matters  that 
are  necessarily  complex  and  delicate,  they  cannot 
accomplish  any  really  useful  purpose.  "The 
wicked  are  wicked,  no  doubt,"  said  Thackeray, 
"and  they  go  astray,  and  they  fall,  and  they  come 
by  their  deserts;  but  who  can  tell  the  harm  that 
the  very  virtuous  may  do?" 

The  three  leading  groups  of  banking  interests 
in  Wall  Street  are  said  to  represent  ^500,000,000 
of  available  capital  each;  the  deposits  in  what  are 
called    the    "trust    banks"    amount    to    between 


126  THE  STOCK  EXCHANGE  FROM  WrfHIN 

^700,000,000  and  $800,000,000,  while  the  banks 
of  the  whole  country  hold  deposits  of  $16,000,000,- 
000.  The  savings  banks  now  hold  $4,450,822,522 
which  is  owned  by  10,009,804  depositors.* 

As  we  have  not  yet  reached  the  point  of  abolish- 
ing property  altogether,  we  may  concede  that 
these  great  combinations  can  do  for  individual 
business  and  for  the  country  at  large  what  cannot 
be  done  without  them.  They  furnish  the  large 
sums  which,  from  time  to  time,  are  required  by 
the  Government,  the  State,  the  town,  the  manu- 
facturer, the  tradesman,  and  the  speculator,  and 
to  each  of  these  —  especially  the  speculator  — 
the  tremendous  develompent  of  this  country  is 
due.  Because  of  speculation  in  securities,  the 
26,000  million  dollars'  worth  of  capital  represented 
on  the  New  York  Stock  Exchange  by  the  stocks 
and  bonds  of  railroad  and  industrial  corporations 
have  found  a  public  market  through  which 
necessary  capital  has  been  raised,  and  the  total 
increases  yearly  by  about  one  billion  dollars. 
This  is  "big"  business,  to  be  sure,  but  it  is  the 
bigness  of  the  whole  people,  for  the  welfare  of 
each  is  the  welfare  of  all. 

Such  large  affairs  naturally  set  people  thinking; 
men  want  light;  they  want  to  know,  entirely  aside 
from  the  doctrines  of  political  platforms  and  stump 

•Report  of  the  Comptroller  of  the  Currency,  October,  30,  1912. 


BANKS  AND  THE  STOCK  EXCHANGE     127 

orators,  to  what  extent  the  relation  of  capital  to 
business  meets  the  test  of  proved  effectiveness  and 
economic  worth.  Especially  do  they  seek  informa- 
tion in  this  oft-discussed  matter  of  speculation  in 
securities  and  of  the  bank's  relationship  to  it;  and 
here,  fortunately,  there  is  no  lack  of  results  by 
which  that  relationship  may  be  tested. 

Pragmatism  tells  us  that  as  phenomena  appear, 
become  mighty,  and  persist  in  accordance  with 
natural  processes,  so  they  demonstrate  their 
ultimate  good  and  their  obvious  usefulness.  In  its 
especial  application  to  the  matters  we  have  dis- 
cussed, pragmatism  teaches  us  to  wait  for  results 
in  estimating  a  particular  business  method,  and 
then  to  study  it  in  its  relation  to  all  business. 
Applying  this  test  to  the  use  of  loanable  bank 
funds  by  those  who  deal  or  speculate  in  the  things 
that  represent  American  enterprise,  we  find  that 
the  very  existence  of  these  enterprises  depends 
upon  the  maintenance  of  these  methods.  Finally, 
both  the  banks  and  the  Stock  Exchange  are  the 
trustees  of  the  property  of  others,  and  in  that 
capacity  their  reciprocal  relations  are  certain  to 
be  attended  by  greater  caution  than  if  they  dealt 
in  a  freehanded  way  with  their  own  property. 
The  magnitude  of  their  undertakings  spells  respon- 
sibility, and  responsibility  breeds  sobriety. 


CHAPTER  V 

PUBLICITY    IN  EXCHANGE  AFFAIRS;    CAUTIONS   AND 
PRECAUTIONS 


CHAPTER  V 

PUBLICITY   IN   EXCHANGE  AFFAIRS;    CAUTIONS  AND 
PRECAUTIONS 

If  a  list  of  "don'ts"  were  compiled  for  the  public 
that  is  interested  in  the  Stock  Exchange,  the  first 
prohibition  would  be  "don't  believe  all  you  read 
in  the  newspapers";  at  least  do  a  little  independent 
thinking  before  jumping  at  conclusions.  The  rela- 
tionship between  the  Stock  Exchange  and  the 
metropolitan  press  is,  with  perhaps  one  exception, 
cordial  in  the  extreme.  The  newspaper  man  is  a 
thinking  person;  if  he  were  not  he  could  not  hold 
his  job.  He  knows,  for  example,  that  the  Stock 
Exchange  is  an  indispensable  part  of  the  ma- 
chinery of  modern  business;  he  is  aware  of  the  fact 
that  it  maintains  a  high  standard  of  probity.  He 
would  be  the  last  man  to  attack  the  institution  un- 
fairly, and  he  is  the  first  to  defend  it,  editorially, 
when  misconceptions  and  unfounded  suspicions 
are  rife. 

But  on  the  other  hand,  newspapers  want  news; 
their  circulation  and  the  popularity  of  their 
advertising  columns   depend  upon  the  skill  and 

131 


132  THE  STOCK  EXCHANGE  FROM  WITHIN 

ability  with  which  they  parade. before  the  public 
everything  that  happens.  If  a  politician  or  a 
clever  and  ambitious  lawyer  makes  a  startling 
charge  against  an  institution  that  occupies  a  con- 
spicuous place  in  our  affairs,  that  is  news,  and  the 
newspaper  must  print  it.  In  order  to  make  the 
news  attractive  to  the  jaded  palate  of  its  readers 
the  dry-as-dust  parts  must  be  skimmed  off,  and 
seasoning  added  in  such  peppers  and  vinegars  as 
the  occasion  permits,  with  a  final  dash  of  spice 
in  the  shape  of  pungent  headlines  that  will  arrest 
and  hold  the  appetite. 

Somewhere  off  in  the  dim  recesses  of  the  edito- 
rial page  there  may  be  a  sober  (and  deadly  dull) 
analysis  of  the  matter,  revealing  the  politician  or 
the  notoriety-seeker  in  his  true  colors,  but  this 
is  often  ignored  by  the  reader.  What  he  wants 
with  his  morning  coffee  is  his  daily  thrill,  and 
he  finds  it  under  blatant  headlines  on  the  first 
page.  Because  he  wants  it,  and  because  he 
won't  be  happy  till  he  gets  it,  the  newspaper 
gives  it  to  him  on  a  generous  scale.  Until  we 
arrive  at  a  Utopian  state  in  which  art,  religion, 
and  kindred  abstractions  satisfy  the  mind  to  the 
exclusion  of  fires,  riots,  suffragettes  and  Stock 
Exchanges,  we  cannot  blame  the  newspapers  for 
giving  us  what  we  want,  nor  the  politicians  for 
helping  the  good  work  along. 


CAUTIONS  AND  PRECAUTIONS  133 

And  yet,  as  Mr.  Bryce  pointed  out  in  his  lec- 
tures at  Yale  on  "The  Hindrances  to  Good 
Citizenship,"  this  willingness  to  accept  as  con- 
clusions the  scare-heads  in  newspapers  which  are 
not,  and  never  were  intended  to  formulate  serious 
opinions,  lays  us  open  to  the  charge  of  indolence; 
"the  neglect  to  think" thus  becomes  a  serious  phase 
of  a  deficient  sense  of  civic  duty.  In  countries 
where  men  are  imperfectly  educated,  or  in  rural 
districts  where  means  of  acquiring  knowledge  are 
small  and  scant  —  where  men  lead  isolated  lives 
out  of  reach  of  libraries  and  learning  —  they  ask 
advice  of  the  priest  or  the  village  schoolmaster, 
and  thus  vicariously  discharge  the  duties  of  citi- 
zenship without  any  real  knowledge  of  the  prob- 
lems before  them  and  without  contributing  to  the 
solution  of  those  difficulties  to  which  the  ever- 
increasing  complexity  of  our  civilization  gives 
rise. 

Now  if  we  apply  this  line  of  thought  to  the  study 
of  such  economic  problems  as  arise  in  our  country 
from  time  to  time,  we  find  that  the  same  condi- 
tions apply.  We  fancy  ourselves  immeasurably 
better  off  than  the  uncultured  frontiersman  who 
must  rely  for  his  information  upon  the  priest  or 
the  schoolmaster,  but  in  our  dumb  submission  to 
the  rant  of  the  hustings  and  the  scare  of  the  head- 
lines are  we   really  discharging  the   functions  of 


134  THE  STOCK  EXCHANGE  FROM  WITHIN 

good  citizenship?  Are  we  not  indolent?  I  can 
have  a  lively  sympathy  for  the  half-breed  in  the 
Canadian  woods  seeking  information  as  best  he 
may,  but  for  the  man  in  our  populous  and  culti- 
vated communities  who  is  too  lazy  to  turn  to  our 
great  public  libraries  for  light  on  the  vexed  and 
vexing  economic  problems  of  the  day,  contenting 
himself  with  the  half-baked  opinions  of  dema- 
gogues and  quacks  —  for  such  a  man  it  is  difficult 
to  say  a  good  word.  There  is  hope  for  the  one;  the 
other  is  the  most  menacing  and  discouraging  type 
in  our  citizenship. 

Take  up  the  morning  newspaper  almost  every 
day  and  we  find  the  crude  essence  of  this  mis- 
information paraded  in  a  way  that  makes  us  sorry 
for  a  public  that  cries  for  such  stuff.  A  custodian 
of  public  funds,  collected  for  the  purpose  of 
erecting  a  monument,  is  found  very  recently  to 
have  squandered  the  money  entrusted  to  him. 
One  of  his  co-trustees,  who  must  have  been  some- 
what lax  in  his  duties,  bewails  the  loss  and  seeks 
to  enlist  sympathy  for  himself  by  hazarding  the 
opinion  that  "the  money  must  have  been  lost  in 
speculation  in  that  hell-hole,  the  Stock  Exchange." 

This  from  a  former  army  officer  and  a  gentleman, 
who  subsequently  states  that  he  has  no  idea  what 
became  of  the  funds,  but  "cannot  think  of  any 
other  explanation."     "Hell-hole"  and  the  "Stock 


CAUTIONS  AND  PRECAUTIONS  135 

Exchange"  constitute  a  good  repast;  the  head- 
line artist  contributes  his  quota  to  the  feast,  and 
so  a  portion  of  the  pubHc  that  feeds  on  this  meat 
arises  from  the  table  with  the  satisfying  conviction 
that  another  awful  indictment  has  been  leveled 
at  the  Exchange,  notwithstanding  an  utter  ab- 
sence of  proof  or  evidence  of  any  kind  tending  to 
show  that  the  delinquent  trustee  had  lost  a  dollar 
in  Wall  Street.  And  suppose  he  did  so  lose  it, 
what  then?  Is  the  Stock  Exchange  or  any  other 
market-place  a  "hell-hole"  merely  because  a  thief 
whom  nobody  suspects  squanders  his  money 
there?  Suppose  he  had  spent  it  in  automobiles, 
or  in  real-estate  speculations,  or  in  campaign 
contributions,  or  in  foreign  missions,  would  the 
same  amiable  characterization  apply? 

Another  familiar  instance  of  making  Wall 
Street  the  scapegoat  is  seen  in  the  "explanations" 
of  defaulting  bank  clerks.  "  When  a  young  bank 
employee,"  says  a  financial  journal,  "with  a  wife 
and  two  children  In  Flatbush,  and  a  salary  of  some- 
thing less  than  $2000  a  year,  takes  to  entertain- 
ing angels,  more  or  less  unawares,  in  the  Great 
White  Way,  and  matching  his  trained  financial 
mind  against  'bankers'  of  another  kind,  he  al- 
ways blames  Wall  Street  when  the  inevitable 
smash  comes.  He  has  been  'speculating  In 
stocks,'  he  says.     He  thinks,  and  a  great  many 


136  THE  STOCK  EXCHANGE  FROM  WITHIN 

people  equally  silly  agree  with  him,  that  he- there- 
by shifts  the  blame  for  his  extravagance  and  folly 
to  other  shoulders.  Entirely  well-meaning  people, 
without  the  slightest  conception  of  the  real  pur- 
poses for  which  the  financial  centre  of  a  nation 
exists,  say:  'Here  Is  another  indictment  against 
sinful  Wall  Street.  Let  us  kiss  away  the  tears  of 
this  misguided  young  man,  who  now  promises  to 
be  good.'  They  never  think  of  asking  the  mis- 
guided young  man  to  shov/  documentary  evidence 
of  his  losses,  which  of  course  every  broker  must 
necessarily  provide,  and  must  keep  in  duplicate  as 
a  matter  of  record."* 

A  police  officer  whose  salary  has  never  exceeded 
^3000  a  year  Is  arrested,  and  it  Is  shown  that  he 
possesses  a  fortune  of  $100,000.  Where  did  he 
get  it.^  Why,  he  made  it  in  the  course  of  nine 
months  of  remarkably  successful  speculation  in 
Wall  Street,  and  one  of  his  henchmen,  too  stupid 
to  know  that  everybody  in  Wall  Street  keeps  a 
set  of  books,  promptly  came  forward  to  endorse  this 
explanation.  Proofs  were  sought  by  the  author- 
ities, and  the  lie  was,  of  course,  exposed,  but  the 
readiness  with  which  the  frugal  officer  sought  to 
fall  back  upon  this  hoary  explanation  shows  that 
it  is  a  permanent  fixture  of  the  crook's  pxoperty- 
room,  and  that  In  the  stage-setting  for  his  sordid 

*The  Wall  Street  Journal,  August  31,  1912. 


CAUTIONS  AND  PRECAUTIONS  137 

accumulations  there  must  be  the  familiar  Wall 
Street  background. 

Another  notorious  pastime,  that  seems  to  be 
well  known  to  every  one  but  the  officers  of  the 
courts,  consists  In  the  practice  of  fraudulent 
bankrupts  In  producln,:^  In  court  a  mass  of  worth- 
less securities  as  evidence  that  the  bankrupt's 
money  has  been  "legitimately"  lost  In  speculation. 
The  certificates  thus  exhibited  are  beautifully 
engraved  memorials  of  defunct  mining  concerns, 
sold  at  so  much  a  pound  by  well-known  dealers. 
It  Is  related  that  a  person  who  wished  to  keep  ever 
before  his  eyes  a  lesson  and  a  warning  once  papered 
the  walls  of  his  house  with  a  wagon-load  of  this 
junk,  which  he  was  able  to  purchase  at  less  than 
the  price  of  ordinary  wall  paper. 

Any  scamp  who  Intends  to  "He  down"  on  an 
uproiitable  contract  can  buy  ^1,006,000  nominal 
of  the  stuff  at  waste-paper  rates.  He  Is  assured 
of  the  sympathy  of  his  family  and  friends,  and,  if 
It  does  not  occur  to  the  lawyers  to  Inquire  who  his 
brokers  were,  and  when,  where,  and  how  these 
purchases  were  made,  he  stands  a  good  chance  of 
going  the  way  of  all  undetected  swindlers,  not- 
withstanding the  fact  that  documentary  evidence 
of  his  purchases,  If  there  were  any,  Is  alwa}  s 
available.  In  this  way  another  Indictment  Is 
framed    against    Wall    Street    in    the    minds    of 


138  THE  STOCK  EXCHANGE  FROM  WITHIN 

thoughtless  people.  They  seem  to  ignore  the 
obviously  improbable  nature  of  the  story,  pre- 
ferring rather  to  make  Wall  Street  the  scapegoat, 
and  by  "Wall  Street,"  in  the  majority  of  cases, 
they  mean  the  Stock  Exchange,  yet  the  Stock 
Exchange  had  no  more  to  do  with  it  than  Trinity 
Church,  at  one  end  of  Wall  Street,  has  to  do  with 
a  stevedore's  crap-game  at  the  other  end. 

So  far  as  concerns  the  case  of  the  crooked  bank 
clerk,  it  is  perfectly  well  known,  or  at  least  it 
should  be,  that  no  member  of  the  New  York  Stock 
Exchange  is  permitted  under  its  rules  to  have  any 
speculative  or  investment  relations  whatever  with 
employees  of  banks  or  trust  companies,  or  of  other 
brokerage  houses.  The  Exchange  authorities 
enforce  this  rule  to  the  letter.  Disgrace  and 
expulsion  faces  the  man  who  would  attempt  it. 
More  than  that,  members  are  unusually  careful 
in  investigating  customers'  accounts  for  reasons 
involving  their  own  safety  in  actions  that  may  be 
brought  in  the  courts;  so  rigorously  is  this  care 
exercised  that  accounts  are  repeatedly  refused 
where  the  bona  fides  of  the  customers  are  not 
fully  understood  by  at  least  one  of  the  firm's 
partners. 

Furthermore,  any  negligence  on  the  member's 
part  in  this  important  matter,  or  in  other  matters 
aflPecting  the  general  welfare  of  the   Stock  Ex- 


CAUTIONS  AND  PRECAUTIONS  139 

change,  places  him  at  once  within  the  all-embrac- 
ing grasp  of  that  one  of  the  Exchange's  by-laws 
which  has  to  do  with  "any  act  .detrimental  to  the 
interests  of  the  Exchange."  This  is  a  large  order, 
and  its  importance  is  well  understood  by  the 
members.  They  know,  and  all  those  who  so 
freely  criticise  the  Stock  Exchange  could  find  out 
if  they  inquired,  that  the  power  of  the  Board  of 
Governors  to  supervise  every  action  of  its  mem- 
bers is  vastly  greater  than  any  power  that  could 
be  vested  in  the  courts.  There  are  constitutional 
limits  to  the  authority  of  common  law;  there 
are  no  limits  whatever  to  the  powers  of  the  gov- 
ernors in  dealing  with  members. 

This  leads  us  to  consider  another  popular 
criticism  of  the  Stock  Exchange,  based  on  its 
unwillingness  to  abandon  its  present  organization 
and  incorporate  under  State  regulation.  The 
public  seems  to  feel  that  this  reluctance  to  submit 
to  State  or  Federal  control  shows  that  the  insti- 
tution is  trying  to  conceal  something,  yet  nothing 
could  be  further  from  the  fact.  The  Exchange 
does  not  Incorporate  because  the  interests  of 
the  public,  which  It  is  bound  to  conserve,  would 
suffer  enormously  by  such  a  step.  "In  its  present 
form,"  says  the  Wall  Street  Journal^  "the  Stock 
Exchange  is  a  private  organization.  It  can 
inspect   any   member's    books    at   any   moment. 


I40  THE  STOCK  EXCHANGE  FROM  WITHIN 

If  it  suspects  him  of  wrongdoing  it  can  tap  his 
telephone  wire,  and  has  done  so  in  the  past.  It 
can  terminate  his  jnembership  for  conduct  which 
no  legislation  could  possibly  touch.  One  reason, 
in  fact,  for  its  admittedly  high  standard  of  probity 
is  the  power,  at  once  democratic  and  despotic, 
exercised  by  the  Governing  Committee  elected 
by  all  the  members.  • 

"  But  if  the  Stock  Exchange  were  reorganized 
under  State  supervision,  much  of  this  power 
would  be  taken  av/ay.  Members  would  possess 
rights  which  no  governing  committee  could  ignore. 
They  could  resort  to  practices  legally  right  and 
ethically  wrong,  which  under  the  present  sys- 
tem would  be  visited  by  swift  punishment. 
Any  member  of  the  public,  now,  who  can  show 
the  Stock  Exchange  committee  an  act  by  a 
broker  toward  him  legally  defensible  but  morally 
wrong,  can  secure  that  broker's  expulsion  from 
the  Stock  Exchange.  Under  State  incorpora- 
tion he  could  only  obtain  redress  by  prolonged 
litigation.  .  .  .  No  legislative  safeguards  are 
needed.  The  Stock  Exchange  now  possesses  a 
power  of  supervision  over  its  members  which 
neither  Congress  nor  the  State  legislature  could 
give.  The  only  power  our  lawmakers  really  pos- 
sess in  the  matter  is  to  limit  that  supervision; 
and  for  this,   if  for  no  other  reason,   the   Stock 


CAUTIONS  AND  PRECAUTIONS  141 

Exchange  should  fight  incorporation  to  the  last, 
and  should  take  every  proper  means  of  publicity 
to  range  public  opinion  behind  it."* 

An  instance  in  which  Wall  Street  in  general, 
and  the  Stock  Exchange  in  particular,  occasionally 
comes  under  the  ban  of  more  or  less  hysterical 
public  condemnation,  results  from  the  work  of 
company  promoters  and  swindlers,  wholly  out- 
side the  Exchange's  jurisdiction.  In  spite  of  the 
vigilance  of  the  postal  authorities  and  the  police, 
every  now  and  then  a  swindler  finds  his  way  into 
this  forbidden  ground,  and  here  he  plies  his  trade. 
Sometimes  it  is  a  land  scheme,  sometimes  it  is 
timber,  recently  it  was  wireless  telegraphy,  often 
it  is  a  gold  mine. 

The  promoter  of  these  enterprises  does  not 
permit  himself  or  his  affairs  to  come  under  the 
scrutiny  of  the  banks,  the  Stock  Exchange,  or 
the  Clearing  House.  He  fights  shy  of  the  curb 
market  as  it  is  now  organized,  and  avoids  the 
watchful  eye  of  the  metropolitan  newspapers 
that  enjoy  the  pastime  of  exposing  frauds.  His 
ways  are  ways  of  darkness.  His  methods  are 
mailing  lists;  his  victims  are  that  numerous  pro- 
geny born  every  minute;  the  lure  is  the  engraved 
letter-head  with  its  "Wall  Street,"  its  list  of 
"Directors,"  and    its    subtle  assurance  that  this 

*  December  7,  1912.     Consult  also  p.  235. 


142  THE  STOCK  EXCHANGE  FROM  WITHIN 

precious  property  now  literally  "given  away" 
bears  the  endorsement  of  the  elect,  and  is  known 
and  approved  by  the  whole  financial  commun- 
ity. 

Whenever  he  can  do  so,  the  artful  gentleman 
behind  this  bait  contrives  to  have  a  market  for 
his  wares.  He  cannot  do  this  anywhere  in  New 
York,  for  the  curb  market,  once  the  refuge  of 
the  swindler,  is  now  closed  to  him,  thanks  to  the 
improved  morale  of  the  curb  brokers  themselves, 
and  to  the  recommendations  of  the  Hughes  Inves- 
tigating Committee.  Consequently  the  dishonest 
company  promoter  is  forced  to  manufacture  his 
market  in  another  city,  where  fluctuations  in  the 
price  of  his  wares  are  made  to  order,  usually  on 
a  rising  scale,  without  interference  by  the  author- 
ities. 

More  often  still,  this  market  and  its  rising  prices 
do  not  exist  at  all;  in  any  case  it  is  only  a  fraudu- 
lent attempt  to  excite  the  cupidity  of  specu- 
lators into  the  belief  that  there  is  active  trading 
in  the  particular  stock  offered  for  sale.  "The 
mines,"  says  the  Chairman  of  the  Hughes  Com- 
mittee in  discussing  these  swindling  operations, 
"are  situated  in  distant  places,  as  Nevada, 
Alaska,  Canada,  Mexico,  and  even  in  South 
America.  In  proportion  as  they  are  remote,  inac- 
cessible,   and    subterranean,   they   are    attractive 


CAUTIONS  AND  PRECAUTIONS  143 

to  the  class  whom  Tacitus  had  in  mind  when  he 
said:   ^'Omne  ignotum  pro  magnifico.^^* 

The  halcyon  days  of  these  enterprises  are  now 
drawing  to  a  close.  Their  field  of  operations  is 
becoming  more  and  more  limited,  the  postal 
authorities  are  redoubling  their  energies,  the 
newspapers  are  closing  their  advertising  columns, 
and  the  victims  who  have  birthdays  every  minute 
are,  it  is  hoped,  growing  wiser.  In  any  case 
immense  losses  have  been  incurred,  and  immense 
harm  done.  To  appreciate  the  extent  of  it, 
one  has  but  to  look  over  the  circle  of  one's  own 
acquaintances,  and  count  the  worthless  specimens 
of  the  engraver's  art  that  have  found  a  resting- 
place  —  permanently,  I  fear  —  in  homes  ill-pre- 
pared to  house  them.  Each  one  of  these  chromos 
has  left  its  sting — each  one  has  excited  a  bitterness 
and  resentment  that,  in  the  misdirected  anger  of 
losers  who  will  not  see  their  own  folly,  is  too  often 
flung  at  Wall  Street  and  at  the  Stock  Exchange. 

The  bucket-shop  method  is  better  known  and 
easier  to  detect  —  hence  it  is  rapidly  being  ex- 
terminated. "Bucketing,"  as  it  is  called,  usually 
flourishes  in  small  towns  at  a  considerable  distance 
from  New  York.  Formerly  it  thrived  in  the 
larger  cities,  even  those  adjacent  to  the  Metropolis, 

*  "The  Hughes  Investigation,"  by  Horace  White,  Journal  of  Political 
Economy,  October,  1909,  pp.  537-8. 


144  THE  STOCK  EXCHANGE  FROM  WITHIN 

but  It  has  now  been  driven  from  these  places. 
It  professes  to  trade  in  stocks  for  its  customers, 
and  its  office  windows  are  usually  decorated  with 
signs  that  indicate,  though  they  do  not  always 
say  so  plainly,  that  the  house  Is  identified  with 
*'the  Stock  Exchange." 

It  allows  its  customers  to  trade  on  what  is 
called  "a  two-point  margin,"  that  is  to  say, 
the  buyer  or  seller  is  "wiped  out"  when  the 
market  has  fluctuated  two  points  against  the 
price  at  which  the  trade  is  made.  The  word 
of  the  house  must  be  accepted  for  the  veracity 
of  its  prices,  which,  however,  are  supplied  to  it 
'  by  telegraph  from  New  York.  Bear  in  mind  that 
these  prices  are  not  telegraphed  to  the  customer, 
but  to  the  mysterious  persons  in  the  rear  office 
of  the  shop.  They  call  themselves  brokers  — 
this  bucket-shop  fraternity  —  but  they  are  not 
brokers  in  any  sense  by  which  that  elastic  term 
is  used.  They  have  not  even  the  "redeeming 
vices"  of  gamblers;  they  are  swindlers. 

The  trader  in  such  a  place  starts  with  all  the 
odds  in  favor  of  the  house.  To  be  exact  he  pays 
two  commissions  and  the  market  "turn"  is  against 
him  ab  initio.  If  the  stock  is  lOO  bid,  lOOj  asked, 
he  buys  at  ioo|  always.  If  he  sells  at  the  same 
quotation,  he  sells  at  lOO.  He  could  not  sell  in  the 
former  case  at  lOOj,  nor  buy  in  the  latter  case  at 


CAUTIONS  AND  PRECAUTIONS  145 

100,  so  he  starts  |  per  cent,  "to  the  bad."  If, 
then,  he  bought  at  lOOj,  when  the  price  is  985-^, 
his  two-point  margin  is  exhausted,  although  the 
price  has  actually  declined  only  1 1  per  cent. 
Thus  he  is  required  to  bet  heavy  odds  on  what 
is  really  no  better  than  an  even  money  chance, 
even  allowing  that  the  prices  are  honest. 

But  they  are  not  honest,  because  in  the  large 
majority  of  such  transactions  the  prices  are 
"rigged,"  that  is  to  say,  the  bandits  who  run 
the  shop  run  it  to  win  and  not  to  lose,  and 
"fix"  the  prices  accordingly.  The  player  is 
thus  required  to  give  odds  by  laying  3  to  4  not 
on  what  the  price  of  a  stock  will  be,  which  is 
ruinous  enough  in  all  conscience,  but  on  what 
his  opponent  will  choose  to  make  it!  Since  we 
are  talking  of  gambling  now  and  not  of  any  real 
transaction,  we  may  as  well  adopt  the  vernacular 
of  the  fraternity  and  say  plainly  that  the  bucket- 
shop  man  holds  the  stakes,  cuts,  shuffles,  and  deals 
the  cards,  and  then  telegraphs  you  what  your 
hand  is.  And  the  loser  at  this  joyous  pastime 
thinks  he  has  been  robbed  by  Wall  Street. 

The  game  works  against  the  player  in  yet 
another  sense,  as  the  fFall  Street  Journal  points 
out,  for  when  you  buy  stock  you  are  entitled  not 
merely  to  the  stock  itself,  but  to  all  the  privileges 
which  it  carries,  and  not  the  least  of  these  privi- 


146  THE  STOCK  EXCHANGE  FROM  WITHIN 

leges  is  the  effect  which  your  purchase  will  have 
on  the  market.  That  is  to  say,  if  ten  thousand 
purchasers  throughout  the  country  should  buy 
even  small  amounts  of  a  certain  stock  on  a  given 
day,  the  combined  effect  of  all  these  purchases 
would  undoubtedly  lift  its  price  on  the  Stock 
Exchange,  and  thus  we  see  that  each  buyer's 
action  carries  with  it  a  privilege  of  no  inconsider- 
able proportions.  But  the  keeper  of  the  bucket- 
shop  does  not  buy  any  stock  for  you  at  all;  he 
merely  makes  a  bet  with  you  as  to  what  the  price 
will  be  —  and  so,  having  robbed  you  of  your 
money,  he  now  robs  you  of  the  privilege  which 
goes  with  your  money,  since  the  alleged  purchase 
of  a  million  shares  of  your  stock  in  bucket-shops 
would  not  have  the  slightest  influence  on  its  price 
at  the  Stock  Exchange. 

The  man  who  has  saved  money  by  his  own 
enterprise  and  thrift  is  a  fool  if  he  gives  his  savings 
to  mining  "bonanzas"  through  the  itching  palms 
of  promoters,  or  to  bucket-shops  through  the  lure 
of  slender  margins.  The  very  fact  that  promo- 
tors  always  play  upon  the  theory  that  distance 
will  lend  enchantment  to  the  view,  and  solicit 
their  funds  solely  by  means  of  prospectuses, 
should  be  a  sufficient  warning  to  the  most  credu- 
lous. A  word  to  his  banker,  or  a  letter  to  any 
responsible  institution  in  Wall  Street,  will  supply 


CAUTIONS  AND  PRECAUTIONS  147 

him    with    the    necessary    information    and    save 
him  from  the  possibihty  of  loss. 

As  to  the  bucket-shops,  if  he  is  in  doubt,  he 
has  but  to  follow  the  same  procedure.  The  New 
York  Stock  Exchange  authorities  will  gladly  tell 
him  whether  the  so-called  "banker  and  broker" 
is  really  a  member  of  the  Stock  Exchange,  and 
the  local  bank  nearest  at  hand  will  expose  any 
fraud  if  it  is  called  upon  for  information.  As 
to  the  two-point  margin  bait,  it  is  a  good  rule 
that  the  smaller  the  margin  asked  for,  the  less 
strength  there  is  behind  the  house  that  asks  it, 
and  just  in  proportion  as  the  margin  require- 
ment diminishes  so  a  suspicion  of  the  solvency 
of  the  firm  should  become  fixed  in  the  mind  of 
the  customer.  This  warning  applies  to  stock- 
brokers no  less  than  to  bucket-shoppers.  If  the 
stockbroker  takes  from  you  a  ten-point  margin, 
and  from  somebody  else  a  two-point  margin,  you 
may  be  sure  your  money  is  being  used  to  finance 
the  other  customer's  trade,  and  you  should  lose 
no  time  in  withdrawing  your  funds  from  such  a 
house.* 

*  In  his  article  on  "The  Hughes  Investigation"  {Journal  of  Political 
Economy,  October,  1909,  p.  539),  Mr.  Horace  White  refers  to  the  attempt 
of  the  Hughes  Commission  to  devise  a  means  whereby  the  company- 
promoter's  activities  might  be  curbed.  He  says:  "The  British  'Companies 
Act'  forbids  the  public  advertisement  or  sale  of  any  securities  unless  the 
issuing  company  has  been  registered  in  a  bureau  of  the  government  with 
information  regarding  the  business  to  be  transacted,  the  names  of  the 
officers  and  other  persons  responsible  for  the  statements  of  fact,  etc.     Much 


148  THE  STOCK  EXCHANGE  FROM  WITHIN 

I  often  think  that  those  who  so  freely  criticize 
the  Stock  Exchange  would  have  applauded  it 
could  they  have  witnessed  the  fight  between  the 
Exchange  and  the  bucket-shops.  In  England, 
because  telegraphs  are  a  Government  monopoly, 
the  transmission  of  prices  by  or  to  bucket-shops 
is  effectually  barred,  and  the  same  is  true  of  the 
telephone.  But  in  this  country  the  transmission 
of  prices  by  wire  is  not  a  breach  of  law,  and  the 
difficulties  that  have  attended  the  attempt  to 
suppress  the  transmission  of  racing  news  by  wire 
to  poolrooms  shows  that  even  if  it  were  prohibited 
there  would  be  great  difficulty  in  its  enforcemxcnt. 

Notwithstanding  these  obstacles,  however,  the 
Stock  Exchange  labored  zealously  to  close  bucket- 
shops  long  before  the  officers  of  the  law  became 

time  was  spent  by  the  committee  in  discussing  the  advisability  of  adopting 
the  English  system,  regardless  of  the  fact  that  it  would  be  operative  in 
only  one  state  of  the  union,  and  that  it  would  serve  as  an  obstacle  to  all 
securities,  sound  and  unsound,  alike.  Thus,  if  the  Pennsylvania  Railroad 
Company  desired  to  issue  a  new  lot  of  bonds  it  could  advertise  and  sell 
them  everywhere  except  in  New  York,  without  the  trouble  and  expense 
of  registration.  Would  it  be  worth  while  to  give  to  other  markets  such  an 
advantage  over  that  of  New  York.?  The  opinion  of  the  governors  of  the 
Stock  Exchange  was  sought  and  was  given  orally,  to  the  effect  that  it 
would  be  unwise  to  take  the  risk  unless  the  benefits  to  be  derived  from 
registration  were  preponderating  and  reasonably  certain.  It  was  their 
belief,  however,  that  a  certificate  from  state  officials  that  a  company  was 
registered  at  Albany  would  be  interpreted  by  the  class  of  investors,  who 
are  most  liable  to  deception,  as  a  certificate  of  the  soundness  of  the  securi- 
ties, in  which  case  the  act  of  registration  would  do  more  harm  than  good. 
The  latter  consideration  prevailed  in  the  committee,  but  recommendations 
as  to  advertising  were  made,  which,  if  adopted  by  the  legislature,  will 
add  something  to  the  responsibilities  of  greedy  and  unscrupulous  news- 
papers, while  not  going  upon  the  doubtful  ground  of  a  censorship  of  the 
press." 


CAUTIONS  AND  PRECAUTIONS  149 

active,  and,  while  the  work  thus  done  was  not 
published  broadcast,  It  was  none  the  less  effective. 
Many  a  bucket-shop  proprietor  doing  business  a 
few  years  ago  under  a  high-sounding  company 
title  probably  never  knew  what  hit  him  when  the 
raid  took  place.  It  was  the  strong  arm  of  the 
Stock  Exchange  working  unostentatiously  that 
did  It,  and  In  that  good  work  It  saved  from  further 
losses  a  large  number  of  Innocent  people  who 
used  the  establishment  with  no  knowledge  of  Its 
real  character. 

As  long  ago  as  1875,  i^  ^^s  contracts  with  the 
telegraph  company,  the  Stock  Exchange  began 
restrictive  measures  to  prevent  its  quotations 
from  reaching  the  bucket-shops.  In  1878  still 
more  forcible  measures  were  employed,  and  in 
1882  positive  steps  were  taken  by  which  the 
Exchange  authorities  personally  Inspected  the 
telegraph  company's  quotation  contracts  with  its 
patrons.  To-day  this  is  carried  to  such  an  extreme 
in  the  determination  to  protect  the  public  from 
the  impositions  of  those  who  might  In  devious 
ways  convey  these  quotations  to  improper  hands 
that  even  members  of  the  Exchange  may  not 
install  wires  from  their  offices  to  outsiders  until 
the  proper  committee  of  Stock  Exchange  authori- 
ties has  vised  the  application. 

Meanwhile,  a  secret-service  has  been  at  work, 


ISO  THE  STOCK  EXCHANGE  FROM  WITHIN 

silently  ferreting  the  hidden,  underground  chan- 
nels in  which  the  bucket-shop  is  forced  to  conduct 
its  operations.  Thanks  to  this  good  work  and  to 
that  now  done  along  similar  lines  by  the  Federal 
authorities,  this  form  of  rascality  is  rapidly  dis- 
appearing. Is  it  too  much  to  hope  that  at  least 
a  part  of  the  unmerited  criticism  of  the  Stock 
Exchange  by  the  victims  of  bucket-shops  may 
also  disappear.'' 

In  heading  this  chapter  "Cautions  and  Pre- 
cautions," my  purpose  was  not  merely  to  warn 
the  credulous  outsider  against  the  news  items  of 
the  day  as  related  to  the  Stock  Exchange,  nor 
was  it  solely  to  point  out  to  him  the  pitfalls  and 
dangers  that  exist  under  the  Wall  Street  mask. 
I  had  in  mind  also  a  word  of  caution  to  Stock 
Exchange  members  themselves.  That  these  gen- 
tlemen are  more  sinned  against  than  sinning  is,  or 
it  should  be,  apparent  to  anybody  who  has  taken 
the  trouble  to  learn  the  A  B  C's  of  the  busi- 
ness. Such  a  man  knows  that  Stock  Exchanges 
occupy  an  Important  place  in  the  mechanism  of 
modern  business;  he  knows,  too,  that  just  in 
proportion  as  their  functions  enlarge  and  the  scope 
of  organized  markets  increases,  so  persons  will 
be  found  who  foolishly  or  dishonestly  abuse  the 
facilities  there  afforded. 

"Reflection,"  says  a  recent  writer,  "seems  to 


CAUTIONS  AND  PRECAUTIONS  151 

have  little  part  in  the  intellectual  equipment  of 
the  assailants  of  organized  markets.  The  fact 
that  the  stock  market  is  sometimes  abused  by 
people  who  know  nothing  of  its  purposes  or  are 
incapable  of  understanding  the  mighty  influences 
which  dominate  it,  is  no  reason  for  considering 
it  as  a  harmful  excrescence  on  the  body  politic. " 

This  fact  established,  one  who  has  been  a  mem- 
ber of  the  Stock  Exchange  for  many  years  may, 
in  a  spirit  of  complete  loyalty  to  the  institution, 
comment  freely  on  some  of  the  mistakes  within 
the  Exchange  itself,  errors  of  judgment  or  sins 
of  omission  that  have  given  to  the  popular 
criticism  of  the  day  its  one  supporting  prop. 
Admitting  mistakes  freely  is  the  surest  way  of 
correcting  them;  frequent  reminders  of  them 
serve  to  keep  one  on  guard  against  their  recur- 
rence. The  history  of  deposit  banking,  for 
example,  has  been,  like  the  history  of  the  Stock 
Exchange,  a  story  of  gradual  development  to 
meet  growing  conditions,  and  this  is  true  also  of 
the  history  of  note  issues,  joint  stock  companies, 
clearing  houses,  cable  transfers  and  of  all  the 
instruments  that  enter  into  that  economic  struc- 
ture which  gives  mobility  to  capital  and  flexibility 
to  credit. 

In  the  very  nature  of  things  the  development 
of  each  part  of  this  gradually  devised  machinery 


152  THE  STOCK  EXCHANGE  FROM  WITHIN 

has  been  attended  by  mistakes,  by  errors  of  judg- 
ment, and  by  occasional  wrongdoing,  yet  we 
do  not  condemn  the  national  banking  system 
because  there  were  once  wildcat  banks;  we  do 
not  utter  hasty  judgments  on  stock-companies 
because  in  other  days  they  were  badly  organized 
and  incompetently  managed;  we  do  not  withhold 
our  support  from  railways  because  they  once 
erred  by  pushing  too  ambitiously  into  projects 
that  ruined  innocent  stockholders;  we  do  not 
abandon  our  form  of  government  because  there 
was  once  civil  war.  No,  but  we  try  to  keep 
all  these  things  in  view  in  order  to  profit  by 
them,  and  to  see  to  it  that  they  do  not  happen 
again.  We  say  of  individuals  that  no  man's  vices 
are  sufficient  reasons  for  not  admiring  his  virtues. 
Why  not  apply  the  same  code  to  business  .f* 

One  of  the  mistakes  of  members  of  the  Stock 
Exchange  in  the  past  has  been  in  trying  to  do  too 
much  business  on  too  little  capital.  This  is  a 
subject  that  calls  for  plain  speaking,  since  it  direct- 
ly caused  two  Stock  Exchange  failures  in  recent 
years,  failures  that  were,  I  am  sorry  to  say,  essential- 
ly the  result  of  dishonesty.  Every  Stock  Exchange 
house  is  looking  for  business,  and  a  house  with 
small  capital  sometimes  gets  more  than  it  should 
attempt  to  handle.  Such  a  house  borrows  from 
the  bank,  as  all  houses  do,  and  allows  its  bankers 


CAUTIONS  AND  PRECAUTIONS  153 

a  20  per  cent,  margin;  so  far  so  good.  But 
it  accepts  business  from  its  customers  on  a  10 
per  cent,  margin,  and  this  means  financing  the 
difference  out  of  the  firm's  capital.  If  the  capital 
is  large,  the  business  is  safe,  but  if  it  is  small,  the 
house  finds  itself  "loaded  up,"  as  the  phrase  is, 
and  is  then  in  such  a  predicament  that  it  must 
either  summon  enough  moral  courage  to  refuse 
business  altogether  and  so  advertise  its  limita- 
tions, or  abandon  its  moral  courage,  sell  its 
customer's  stocks  "short"  and  incur  the  risk  of 
buying  them  back  cheaper. 

The  latter  course  is  dishonest;  it  is  in  fact 
nothing  more  or  less  than  a  form  of  "bucketing," 
since  the  customer  must  lose  for  the  broker  to 
save  himself,  while,  if  the  customer  wins,  the 
broker  may  not  be  able  to  pay.  This  is  not  a 
common  practice  of  course  —  first,  because  99 
per  cent,  of  the  members  are  absolutely  honest; 
second,  because  the  majority  of  those  who  carry 
accounts  on  the  books  of  Stock  Exchange  houses 
are  wise  enough  to  acquaint  themselves  with  the 
firm's  resources  and  to  withdraw  when  too  much 
business  becomes  apparent,  and,  third,  even  though 
a  broker  were  not  himself  essentially  honest, 
he  would  not  dare  expose  himself  to  the  expulsion 
and  disgrace  that  would  attend  exposure.  Never- 
theless,   the  thing    has   been    done,    and    it   may 


154  THE  STOCK  EXCHANGE  FROM  WITHIN 

conceivably  occur  again.  How  then  may  it  be 
avoided  ? 

As  the  Stock  Exchange  is,  as  we  have  seen, 
an  unincorporated  body  with  a  set  of  rules  which 
no  legislature  and  no  court  could  enforce  without 
depriving  a  man  of  his  constitutional  prerogatives, 
it  is  obvious  that  this  and  all  other  reforms  must 
come  from  within;  all  the  many  reforms  that 
are  constantly  lifting  the  Exchange  to  a  higher 
level  come  from  that  quarter.  There  are  iioo 
members  of  the  Stock  Exchange  and  perhaps  600 
of  these  are  engaged  in  active  commission  busi- 
ness. A  committee  of  the  governors  can  enter 
any  member's  office  at  any  time,  and  demand 
every  book  or  record  without  reserve.  It  has 
absolute  power  to  compel  him  to  do  anything  that 
in.  its  wisdom  seems  desirable.  If  he  is  doing  too 
much  business  on  too  little  capital,  he  can  be 
forced  to  restrict,  or  to  retire  from  business  alto- 
gether. Failure  to  comply  Immediately  means 
expulsion  and  a  peculiarly  stinging  disgrace. 
Naturally  in  the  face  of  these  despotic  powers  any 
plan  of  mutually  guaranteeing  brokers'  accounts, 
such  as  that  employed  by  Lloyds  in  London,  or 
by  the  Agents  de  Change  on  the  Paris  Bourse,  would 
seem  unnecessary. 

The  remedy  lies,  first  with  the  members  them- 
selves In  striving  to  attain  continually  to  a  higher 


CAUTIONS  AND  PRECAUTIONS  155 

standard  of  business  morality,  and  second  with 
increased  watchfulness  by  the  committee  having 
this  matter  in  charge.  In  point  of  fact  it  is 
apparent  that  both  these  solutions  are  now  being 
employed  to  a  greater  extent  than  ever  before. 
The  two  failures  that  occurred  some  years  aga 
as  a  result  of  this  iniquitous  practice  hurt  the 
Exchange,  and  stung  the  members  to  the  quick. 
It  can  never  happen  again  if  the  vigilance  of  the 
governors  can  prevent  it,  and  yet  every  now  and 
then  a  bank  fails  even  under  the  watchful  eye 
of  the  bank  examiner.  No  committee  and  no 
group  of  committees  can  watch  the  books  of  600 
houses  engaged  in  a  business  in  which  the  dividing 
line  between  sound  and  unsound  business  may  be 
crossed  and  recrossed  with  surprising  suddenness 
many  times  a  day.  The  members  themselves 
must  look  to  this,  and  that  is  what  they  are  doing 
to-day,  as  never  before,  with  an  earnestness 
begotten  of  real  pride  in  their  great  organization. 
If  they  do  not  do  it,  if  they  relax  in  any  degree 
the  vigilance  upon  which  the  proper  conduct  of 
their  business  depends  in  this  important  respect, 
they  will  be  forced  sooner  or  later  to  resort  to  the 
plan  of  guaranteeing  the  accounts  of  their  fellow 
members,  or  to  submit  to  that  form  of  govern- 
ment incorporation  or  regulation  which  must 
impair,    if    it    does    not    actually    destroy,    their 


156  THE  STOCK  EXCHANGE  FROM  WITHIN 

usefulness.  Members  must  also  see  to  it  that 
manipulation  in  its  improper  forms  is  driven  out 
of  the  Exchange,  and  that  every  conceivable  pre- 
caution is  taken  in  the  listing  of  new  securities. 
These  matters  I  shall  discuss  elsewhere.  Mean- 
time it  is  cheering  to  note  that  Stock  Exchange 
failures,  whether  arising  from  this  or  any  other 
cause,  are  diminishing  in  number.  In  London,  at 
the  account  day  immediately  following  the  failure 
of  the  house  of  Baring,  thirty  Stock  Exchange 
houses  announced  their  inability  to  meet  their  obli- 
gations. Certainly  the  New  York  Stock  Exchange 
has  not  witnessed  so  many  failures  in  ten  years. 
One  of  the  many  excellent  results  of  the  work 
of  the  Hughes  Committee  from  the  standpoint 
of  the  Stock  Exchange  was  the  publicity  that 
came  of  it.  Critics  of  the  institution  had  long 
found  fault  with  it  because  of  its  atmosphere 
of  aloofness,  the  air  of  mystery  that  seemed  to 
surround  it,  its  silence  under  attack,  and  its 
apparent  unwillingness  to  defend  itself  from 
adverse  comment.  This  reticence,  however,  while 
it  did  harm,  was  more  apparent  than  real.  In 
so  far  as  the  Stock  Exchange  is  concerned  the 
advantages  of  publicity  have  long  been  recognized. 
The  difficulty  has  been  in  having  its  purposes 
and  its  methods  properly  attested  by  competent 
authority  in    a    way    that    would    enlighten  *  the 


CAUTIONS  AND  PRECAUTIONS  157 

public  and  carry  conviction.  Members  and  friends 
of  the  Exchange  feel  very  strongly  that  in  this  day 
and  age,  when  the  spirit  of  publicity  is  in  the 
air,  the  Stock  Exchange  should  fall  in  line  with 
a  resolute  determination  to  assert  itself  and  make 
itself  heard  on  all  proper  occasions. 

If  a  sub-committee  of  Congress  retains  as 
counsel  a  shrewd  lawyer  who  by  devious  ex-parte 
methods  reads  into  the  record  and  thence  into 
the  newspapers  only  such  biased  and  prejudiced 
information  as  will  do  harm  to  the  Exchange, 
while  rigidly  excluding  all  that  properly  belongs 
there  by  way  of  refutation  and  explanation, 
energetic  steps  should  be  taken  to  remedy  this 
obvious  injustice  by  invoking  that  spirit  of  fair 
play  which  is  essential  to  any  judicial  inquiry. 
These  are  not  the  days  of  the  Inquisition.  We 
have  progressed  beyond  the  point  of  the  Star 
Chamber.  Members  of  the  Stock  Exchange 
know  that  they  will  receive  fair  play  from  the 
newspapers  whenever  they  seek  it,  but  they 
cannot  expect  to  find  their  side  of  the  case  stated 
unless  they  themselves  take  the  necessary  steps 
to  secure  its  presentation.  And  the  way  to  do 
this  is  to  proceed  with  energy  and  determination 
against  every  avenue  from  which  the  malicious 
slander  or  the  insidious  suggestion  emanates. 

The  time  has  passed  to  sit  supinely  under  every 


158    THE  STOCK  EXCHANGE  FROM  WITHIN 

sinister  attack  and  imagine  that  a  consciousness 
of  rectitude  will  suffice  as  an  answer.  Let  the 
Exchange  bestir  itself.  If,  as  happened  very 
recently,  a  judge  on  the  bench  can  so  lose  his 
poise  as  to  say  to  a  common  thief  at  the  bar, 
'"You  have  committed  a  petty  theft  and  you  must 
go  to  jail  —  but  had  you  gone  down  to  the  Stock 
Exchange  and  stolen  a  million  you  would  go 
free"  —  such  an  unworthy  utterance  should  be 
handled  promptly  and  without  gloves  by  the 
Exchange  authorities,  and  the  same  course  of 
treatment  should  be  applied  vigorously  to  every 
thoughtless  minister  of  the  gospel  and  every 
cheap  politician  who,  because  the  Exchange  has 
so  long  remained  silent,  may  think  that  such 
silence  entitles  him  to  utter  any  libel  that  comes  to 
mind.  The  newspaper  that  publishes  the  original 
utterance  of  this  judge  or  that  preacher  will 
publish  also  the  steps  taken  by  the  Exchange 
to  bring  him  to  book,  and  even  though  the 
slanderer  may  escape  the  consequences  of  his  act 
through  the  technicalities  of  the  law,  or  otherwise, 
the  knowledge  that  the  Exchange  is  at  last 
aroused  from  its  lethargy  and  in  a  fighting  mood 
will  serve  to  deter  others  from  similar  indiscretions. 
I  violate  no  confidence  when  I  say  that  henceforth 
the  Stock  Exchange  will  be  found  defending 
itself  manfully,  and  I  venture  to  remind  all  noisy 


CAUTIONS  AND  PRECAUTIONS  159 

seekers  of  notoriety  that  "thrice  is  he  armed  who 
hath  his  quarrel  just." 

The  Stock  Exchange  has  felt,  since  the  report 
of  the  Hughes  Commission  in  1909,  that  such  a 
report,  by  such  a  body  of  men,  would  inevitably 
stay  the  hand  of  many  of  its  detractors  by  showing 
them  just  what  the  Exchange  is  trying  to  do,  and 
just  how  the  work  is  done.  "The  committee," 
says  its  chairman,  "was  in  session  about  six 
months.  Its  expenses  were  paid  by  the  members 
themselves,  and  since  frugality  was  a  necessity 
the  services  of  the  stenographers  were  dispensed 
with,  the  members  taking  only  such  notes  of  the 
testimony  of  witnesses  as  each  one  deemed  Im- 
portant to  the  matter  in  hand.  The  officers  of 
all  the  Exchanges  in  New  York  City  were  invited 
to  appear  before  the  committee  and  answer 
questions  both  orally  and  in  writing,  and  all  of 
them  responded  promptly  and  courteously,  as 
often  as  they  were  asked  to  do  so.  Many  volun- 
teer witnesses,  citizens  of  the  State,  were  heard. 
None  such  was  refused  a  hearing.  Citizens  of 
other  States  were  not  called,  or  accepted,  as 
witnesses  unless  they  had  given  evidence,  by  pub- 
lished writings  or  otherwise,  that  they  had  some- 
thing of  value  to  contribute  to  the  discussion.  "* 

•  "The  Hughes  Investigation,"   by  Horace  White,  Journal  of  Politictl 
Economy,  October,  1909,  p.  529. 


i6o  THE  STOCK  EXCHANGE  FROM  WITHIN 

This  committee  was  composed  of  Horace  White, 
Chairman;  Charles  A.  Schieren,  David  Leventritt, 
Clark  Williams,  John  B.  Clark,  Willard  V.  King, 
Samuel  H.  Ordway,  Edward  D.  Page,  Charles 
Sprague  Smith,  Maurice  L.  Muhleman. 

Nobody  who  read  these  names  doubted  the 
independence  and  public  spirit  of  its  members. 
It  was  precisely  the  sort  of  committee  that  all 
fair-minded  men  welcomed.  The  high  character 
of  the  members  carried  assurance  of  their  good 
faith;  their  wisdom  and  practical  experience  meant 
a  critical  analysis  of  the  subject;  their  indepen- 
dence of  spirit  made  a  whitewash  impossible. 
Here  then  was  the  long  looked  for  solution.*  If 
there  were  abuses,  nobody  was  more  anxious  to 
know  of  them  and  of  the  remedies  for  them  than 
the  members  of  the  Exchange;  if  indefensible 
conditions  existed  nobody  stood  readier  to  correct 
them.  It  was  felt  that  this  was  the  first  and 
greatest  step  toward  publicity  under  the  right 
conditions,  and  that  a  valuable  contribution  to 
the  popular  knowledge  of  an  intricate  and  greatly 
misunderstood  subject  would  result.  There  was 
nothing  ex-parte  or  one-sided  about  the  com- 
mittee's deliberations;  everybody  with  a  grievance 
might    state    it,    and    both    sides    were    accorded 


*  The  report   of  the  Hughes  Investigating  Committee  is  published  in 
full  in  the  appendix  to  this  volume. 


CAUTIONS  AND  PRECAUTIONS  i6i 

fair  play.  But,  mirabile  dictu,  the  very  fact  of 
its  fairness  is  found,  three  years  later,  to  afford 
a  reason  for  flouting  it  at  the  hands  of  counsel 
for  a  congressional  sub-committee  that  will  not 
hear  both  sides!  Is  there  anything  just  or  equi- 
table in  the  proceedings  of  such  a  body,  or  in  the 
prejudiced  emanations  of  its  precious  lawyer?  Is 
it  conceivable  that  the  law-making  branch  of  our 
government  will  give  serious  heed  to  a  report 
thus  conceived  in  bias  and  born  in  inquisition?  I 
think  not. 

Passing  to  more  agreeable  topics,  the  late 
Addison  Cammack  is  said  to  have  remarked  on 
one  occasion  that  publicity  was  ruining  the  busi- 
ness of  Wall  Street  and  the  Stock  Exchange  and 
would  ultimately  drive  it  all  away.  Those  were 
the  days  of  inadequate  and  unreliable  balance 
sheets,  of  suppressed  reports  of  earnings  and 
assets,  of  accounts  that  were  never  subjected  to 
independent  audits,  and  of  a  general  atmosphere 
of  mystery  that  led  to  financial  abuses  of  all 
kinds.  As  a  result  of  those  conditions  there  was 
created  in  the  public  mind  another  vague  aversion 
toward  the  Stock  Exchange,  and  a  popular  preju- 
dice which  has  been  hard  to  dispel.  Cammack 
had  been  brought  up  in  the  old  school;  he  saw 
what  was  coming,  but  he  mistook  causes  for 
effects.     He   would    probably   turn   in    his   grave 


i62  THE  STOCK  EXCHANGE  FROM  WITHIN 

could  he  see  the  new  conditions  and  contrast 
them  with  the  old.  As  a  matter  of  fact  nothing 
could  be  more  democratic  in  principle  than  the 
way  the  business  Is  conducted  nowadays.  The 
rights  of  stockholders  to  information,  the  reports 
and  balance  sheets  submitted  to  them,  the  mass 
of  Wall  Street  financial  material  in  the  magazines 
and  journals,  the  stock  ticker,  the  news  ticker, 
the  printed  news  bulletins,  the  card  Index  system, 
the  statistical  manuals  and  the  quotation  lists 
published  In  the  morning  and  evening  newspapers, 
together  with  the  market  letters  constantly  cir- 
culated by  brokerage  houses,  these  are  evidences 
that  the  public  is  entitled  to  full  Information  and 
that  many  avenues  by  which  It  may  safeguard 
its  interests  are  always  open.* 

It  has  long  been  known  that  investors  and 
speculators  in  America  enjoy  vastly  more  safety 
In  their  market  operations  through  these  various 
avenues  of  publicity  than  do  Investors  and  specu- 
lators abroad.  There  are  no  tickers  worthy  of 
the  name  across  the  water,  and  the  daily  list 
of  business  done,  as  published  In  our  newspapers. 


*One  of  the  witnesses  before  the  Hughes  Committee  actually  recom- 
mended that  the  stock  ticker  be  suppressed.  Such  a  suggestion  is  silly 
and  would  lead  to  great  confusion  and  many  complaints  from  the  public. 
The  ticker  is  essential  to  publicity  and  offers  the  very  protection  which 
the  Stock  Exchange  seeks  to  extend.  Speculation  was  never  so  unscrupu- 
lous and  wrongdoing  never  so  abundant  as  in  the  days  before  this  instru- 
ment was  invented. 


CAUTIONS  AND  PRECAUTIONS  163 

with  bid  and  asked  prices  and  total  transactions 
in  detail,  is  unheard  of  among  all  the  Bourses 
of  Europe.  The  eminent  French  economist,  Paul 
Leroy-Beaulieu,  speaks  very  earnestly  of  the 
superiority  of  our  New  York  Stock  Exchange 
system  in  this  matter;  he  says  the  need  for  a 
similar  method  in  France  is  "very  urgent,"  that 
the  information  thus  spread  broadcast  is  "very 
instructive,"  that  the  pledge  of  publicity  "is 
better  assured  in  the  United  States  than  in  any 
other  country  of  the  world,"  and  that  an  imme- 
diate reform  along  these  lines  is  "absolutely 
necessary"  in  Paris  in  the  interest  of  the  public* 
This  leads  to  another  word  of  caution  suggested 
by  the  fact  that  the  public,  despite  what  is  done 
for  it,  does  not  always  avail  itself  of  these  safe- 
guards. Men  buy  worthless  mining  stocks  with- 
out bothering  to  inquire  into  their  bona  fides. 
They  put  their  savings  into  new  and  untried 
enterprises  and  they  neither  read  the  balance 
sheets  nor  attend  the  meetings.  A  thousand 
stockholders  will  attend  a  meeting  in  London  and 
they  will  have  their  questions  answered  whether 
the  majority  in  control  likes  it  or  not.  In  New 
York  almost  nobody  attends  these  meetings. 
The  stockholder's  right  to  information  is  absolute, 
but  he  does  not  go  and  get  it,  and  so  finally  when 

*  U Economiste  Francois,  Paris,  October  sth. 


1 64  THE  STOCK  EXCHANGE  FROM  WITHIN 

something  goes  wrong  he  writes  angry  letters  to 
the  newspapers  and  damns  both  Wall  Street  and 
the  Stock  Exchange  because  he  has  been  burned, 
although  the  fire  escape  and  the  extinguisher 
were  always  at  his  hand.  "It  is  all  very  well" 
says  the  Wall  Street  Journal,  "to  talk  about  what 
the  law,  the  newspaper  press,  and  the  Stock  Ex- 
change can  do  to  protect  the  investor,  but  the 
investor  himself  can  do  rnore  than  all  his  protec- 
tors put  together.  His  investment,  however  con- 
servative and  secure,  carries  responsibilities  as 
well  as  privileges,  and  it  is  his  duty  to  discharge 
the  one  in  order  to  safeguard  the  other."* 

*  When  the  first  issue  of  Union  Pacific  convertible  bonds  matured,  so 
many  people  had  failed  to  notice  that  their  bonds  could  be  exchanged 
dollar  for  dollar  against  the  stock,  selling  at  much  higher  price  with  greater 
yield,  that  the  company  extended  the  time  for  conversion.  It  would 
have  been  entirely  warranted  in  paying  off  such  bondholders  at  par,  but 
it  spent  considerable  sums  in  advertising  them  of  a  privilege  they  should 
have  known  all  about.  In  the  face  of  all  this,  bonds  came  in  for  conversion 
many  months  after  the  extended  time,  and  the  bondholder  sincerely 
believed  that  he  had  a  grievance  because  his  bond  was  redeemed  at  par. 

The  same  thing  happened  in  the  case  of  the  old  St.  Paul  7's,  which  were 
convertible  into  preferred  stock.  Bondholders  allowed  themselves  to 
be  paid  off  at  par  for  a  bond  which  had  been  standing  at  170  and  apparently 
had  never  read  the  terms  of  their  own  mortgage.  What  can  the  law,  the 
press,  or  the  banker  do  against  such  criminal  negligence  as  this?  And  if 
bondholders  are  remiss,  what  shall  be  said  of  the  average  stockholder.'' 
He  is  improving  undoubtedly,  but  he  has  still  a  great  deal  to  learn.  His 
right  to  information  is  unquestionable,  but  he  fails  to  exercise  it  in  anything 
like  the  degree  he  should.  It  is  to  be  feared  also  that  he  does  not  take  a 
great  deal  of  trouble  in  learning  to  analyze  such  reports  and  balance  sheets 
as  may  be  submitted  to  him. 

A  stockholder  should  never  hesitate  to  write  to  the  oflicers  of  his  company 
for  information.  He  should  do  it  often,  and  he  should  get  other  stock- 
holders to  do  the  same  thing.  One  stockholder  writing  frequently  may  be 
regarded  as  a  nuisance.  Ten  will  be  treated  with  respect,  and  it  will  be 
a  very  autocratic  control  which  will  venture  to  deny  information  to  a 


CAUTIONS  AND  PRECAUTIONS  165 

He  must  learn  to  make  Inquiries,  to  discriminate, 
to  use  his  wits,  to  read  mortgages,  to  study  sinking 
funds  and  operating  ratios.  He  must  eschew  the 
financial  columns  of  questionable  newspapers  and 
confine  his  attention  to  those  of  established 
probity.  He  must  not  put  all  his  investment 
eggs  into  one  basket.  The  Stock  Exchange  can- 
not do  all  this  for 'him,  but  It  Is  always  ready  to 
help  him,  and  the  Information  he  requires  may  be 
had  for  the  asking. 

In  a  recent  public  address  the  president  of  a 
great  American  railway  sounded  an  encouraging 
note.  "We  railway  men,"  he  said,  "have  been 
In  a  practical  school,  having  taken  a  thorough 
course  in  working  economics.  We  have  learned 
that  a  railway  can  thrive  only  as  a  result  of  the 
prosperity  of  the  community  it  serves,  and  that 
the  best  policy,  from  the  viewpoint  of  permanent 
railway  interests,  is  one  of  co-operative  helpful- 
ness."* The  New  York  Stock  Exchange  has 
learned  the  same  lesson,  in  a  similar  school.  As 
an  institution  it  realizes  that  if  It  Is  to  grow  in 
prosperity  the   public  must    grow,    and    that    as 


hundred  stockholders,  taking  a  legitimate  step  to  protect  their  own  proper 
interests.  The  newspapers  are  glad  to  furnish  any  information  in  their 
power,  but  if  the  stockholder  would  write  to  the  company  first  and  the 
newspaper  afterward,  he  would  probably  derive  more  ultimate  advantage. 
■ —  Wall  Street  Journal,  September  22,  1909. 

*  Address   by  President   Finlay  of  the   Southern   Railway,   before   the 
Transportation  Club  of  Indianapolis,  October,  1912. 


i66  THE  STOCK  EXCHANGE  FROM  WITHIN 

the  public  is  attracted  to  investment  and  specula- 
tion by  the  soundness  of  the  institution  through 
which  it  deals  so  it  requires  and  must  receive 
full  information  and  an  assurance  of  fair  play. 
** Co-operative  helpfulness"  is  the  only  way. 
Members  of  the  Exchange  who  become  discour- 
aged now  and  then  must  bear  this  in  mind. 
In  the  face  of  every  harassing  annoyance  they 
must  never  cease  their  work  of  keeping  their 
house  in  order,  and  of  inviting  that  portion  of  the 
public  that  is  open-minded  to  lend  a  hand.  Their 
labors  resemble  the  task  of  Sisyphus;  like  him 
they  must  cultivate  the  spirit  of  "everlasting 
hope,"  and  when  unworthy  assailants  seek  to 
prejudice  the  popular  mind,  they  must  stand 
forth,  give  blow  for  blow,  and  never  say  die. 

Pessimists  may  blind  their  eyes  to  the  manifold 
evidences  of  material  progress  on  every  hand,  but 
just  as  the  workshop,  the  farm,  the  school,  the 
hospital,  and  the  bank,  each  supplies  proof  of 
continuing  improvement,  so  also  in  its  sphere  of 
usefulness  does  the  Stock  Exchange.  Within  a 
few  years,  for  example,  it  has  rid  itself  of  the  un- 
listed department,  and  this  may  very  properly  be 
mentioned  as  a  distinct  progression.  Under  the 
old  system  a  limited  number  of  industrial  cor- 
porations were  permitted  to  obtain  a  market  on 
the    Exchange  for  their  securities,  although  they 


CAUTIONS  AND  PRECAUTIONS  167 

furnished  but  few  figures  to  the  Listing  Com- 
mittee in  return.  This  was  a  practice  wholly  at 
variance  with  the  duty  of  the  Exchange  to  protect 
the  investor,  since  it  practically  assures  him  that 
corporations  admitted  to  the  Exchange  have 
demonstrated  their  worth  to  the  authorities. 
That  character  and  countenance  should  be  given 
to  the  so-called  "unlisted  department"  was  a 
mistake,  and  it  has  been  abolished. 

In  this  reform  the  Listing  Committee  accom- 
plished a  twofold  blessing  in  setting  the  Exchange 
right  with  the  public  by  ridding  their  institution 
of  anything  approaching  the  blind  pools  of  early 
days  and  at  the  same  time  forcing  certain  wealthy 
corporations  to  abandon  their  policy  of  conceal- 
ment or  lose  the  privilege  of  the  floor.  Certainly 
if  the  country's  leading  steel  corporation  can 
afford  to  take  its  150,000  stockholders  and  its 
250,000  employees  into  its  confidence  and  treat 
the  whole  public,  including  its  competitors,  with 
entire  frankness,  there  is  no  insuperable  difficulty 
about  the  others.  In  any  case  the  desire  to  pro- 
tect the  investor,  which  is  the  controlling  motive 
of  the  elaborate  restrictions  Imposed  by  French 
and  English  laws  in  new  security  ofi"erIngs,  has 
advanced  far  in  this  country  within  the  last  few 
years,  and  the  farther  it  goes  the  more  popular 
it  becomes. 


1 68    THE  STOCK  EXCHANGE  FROM  WITHIN 

That  there  is  still  work  for  the  Listing  Com- 
mittee to  do  goes  without  saying.  One  of  the 
most  promising  improvements  that  comes  to 
mind  at  the  moment  is  the  one  employed  in 
London,  where  shares  of  new  companies  are  not 
admitted  to  the  Board  unless  a  sufficiently  large 
allotment  has  been  made  to  the  public.  This 
is  also  the  rule  in  New  York,  but  perhaps  we  may 
add  to  its  effectiveness  by  increasing  the  size  of 
the  public  allotments.  Another  praiseworthy 
feature  of  the  London  system  is  that  which  has 
to  do  with  vendor's  shares,  which  are  not  listed 
until  six  months  after  the  admission  of  the  com- 
pany's securities.  Under  this  plan  if  one  or  more 
individuals  secure  a  block  of  stock  in  payment 
for  properties  in  the  concern,  they  are  prevented 
from  unloading  those  shares  on  the  public  until 
a  sufficient  time  has  elapsed  to  determine  the 
merit  of  the  property. 

Another  instance  of  progress  made  in  recent 
years  in  the  internal  mechanism  of  the  Exchange, 
is  the  abolition  of  fictitious  transactions  or  "wash 
sales,"  utterly  indefensible  transactions  not  en- 
forcible  at  law.  These  were  always  prohibited 
under  the  rules,  yet  despite  this  a  flagrant  instance 
of  a  violation  was  discovered  in  which  the  guilty 
were  made  to  suffer.  So  far  as  I  am  aware  it 
was   the  only   case  on   record   in  which  obvious 


CAUTIONS  AND  PRECAUTIONS  169 

collusion  between  buyer  and  seller  in  a  Stock 
Exchange  transaction  was  shown.  The  broker 
in  this  instance  must  have  known  that  the  Com- 
mittee would  demand  his  books  and  that  it  would 
appear  that  no  genuine  bargain  had  taken  place. 
If  he  did  not  know  it,  he  knows  it  now.  The 
example  made  of  him  will,  I  fancy,  prevent  a 
recurrence  of  the  episode. 

This  leads  to  the  subject  of  ''manipulation," 
as  It  is  termed,  or  the  uses  to  which  the  facilities 
of  the  Exchange  are  sometimes  put  to  give  certain 
stocks  an  appearance  of  activity  out  of  propor- 
tion to  their  normal  movement.  Now  we  must 
assume  as  our  major  premise  in  discussing  this 
matter  that  any  artificial  interference  with  the 
natural  operation  of  supply  and  demand  is  per- 
nicious; from  the  standpoint  of  economics  it  is 
harmful.  The  Stock  Exchange  has  nothing  to 
conceal,  and  it  recognizes  not  only  that  manipula- 
tion exists,  but  that  at  times  it  assumes  the 
proportions  of  a  real  evil.  Therefore  it  is  doing 
what  it  can  to  stop  it,  and  it  will  continue  to  do 
so.  Whenever  unwonted  activity  arises  nowa- 
days in  a  security  long  dormant,  as  happened 
very  recently  in  the  stock  of  a  certain  gas  company, 
the  governors  of  the  Exchange  entrusted  with 
such  things  take  the  matter  in  hand  and  put  a 
stop  to  it  if  obvious  manipulation  can  be  shown 


170    THE  STOCK  EXCHANGE  FROM  WITHIN 

after  investigation.  The  public  and  the  news- 
papers know  nothing  about  it;  the  vial  of  their 
criticism  is  poured  forth  only  when  something 
escapes  the  watchful  eye  of  the  Exchange  authori- 
ties, as  must  inevitably  happen  now  and  then. 
But  If  these  critics  could  know  how  indignant 
the  members  of  the  Exchange  became  when  the 
Hocking  Coal  episode  occurred,  and  if  they  could 
see  the  resolute  determination  of  all  hands  to  pre- 
vent another  such  occurrence,  they  would  at  least 
give  the  Exchange  credit  for  faithfully  attempting 
to  suppress  manipulation  of  the  flagrant  sort. 

The  fact  Is  that  all  forms  of  manipulation  are 
by  no  means  Improper;  some  of  it  performs  a 
useful  service  and  Is  a  necessary  and  legitimate 
part  of  the  functions  of  the  Exchange.  To  under- 
stand how  true  this  is  let  us  consider,  for  example, 
the  case  of  a  corporation  that  has  been  organized, 
let  us  say,  to  develop  a  group  of  recently  discovered 
coal  properties  in  new  territory.  This  is  legitimate 
endeavor  as  applied  to  American  enterprise;  in  a 
broad  sense  It  Is  the  spirit  of  adventure  and 
speculation  that  has  made  our  country  commer- 
cially rich  and  powerful. 

Now,  in  order  to  develop  this  enterprise,  it  Is 
necessary  to  ask  the  public  to  buy  its  shares  or 
its  certificates  of  debt  and  thus  become  partners 
in  the  undertaking.     In  that  way  our  great  rail- 


CAUTIONS  AND  PRECAUTIONS  171 

ways  were  built  and  our  Western  country  opened 
to  progress.  But  the  public  will  not  support  the 
new  enterprise  until  it  knows  something  of  its 
merits,  and  accordingly  the  company  introduces 
its  property  through  the  medium  of  that  great 
central  market-place  —  the  Stock  Exchange  — 
furnishing  the  Exchange  authorities  with  its  cre- 
dentials in  minute  detail. 

At  this  point  the  so-called  manipulation  takes 
place.  The  securities  are  new,  the  company  may 
wish  to  advertise  them,  attract  attention  to  them, 
and  solicit  a  public  interest  in  the  laudable  enter- 
prise that  lies  behind  them,  all  of  which  is  as  right 
and  proper  as  it  Is  for  any  merchant  to  establish 
a  market  for  any  new  article  on  his  shelves.  To 
accomplish  his  purpose  the  merchant  must  first 
fix  an  arbitrary  price;  If  the  public  will  not  buy 
at  that  price  he  must  "manipulate"  a  lower 
price,  and  in  all  his  subsequent  dealings  there  must 
be  manipulation  of  one  form  or  another  designed 
to  conform  to  the  supply  and  demand  in  that 
particular  article. 

The  men  behind  the  coal  company  in  ques- 
tion must  do  the  same  thing.  They  fix  a  price 
at  which  their  shares  are  introduced  in  the 
market-place;  let  us  say  this  price  is  ^100  per 
share.  This  is  manipulation.  It  may  happen 
that  the  public  will   not  buy   at  that  price,   in 


172    THE  STOCK  EXCHANGE  FROM  WITHIN 

which  case  the  price  is  lowered,  let  us  say,  to  80. 
This  also  is  manipulation.  But  is  it  improper? 
Is  it  subversive  of  good  morals?  Is  it  an  un- 
healthy interference  with  natural  laws  of  supply 
and  demand?  Is  it  anything  less  than  a  legiti- 
mate method  of  attracting  capital  into  worthy 
enterprises  ? 

Critics  are  invited  to  remember  that  the  Stock 
Exchange  does  not  buy  or  sell  anything;  it 
merely  acts  as  a  market-place  through  which, 
among  other  things,  capital  may  be  directed  from 
channels  where  it  is  least  needed  into  those  where 
it  may  be  most  beneficially  and  profitably  em- 
ployed. If,  therefore,  an  oil  company  or  a  coal 
company  or  any  other  enterprise  whose  ultimate 
success  cannot  fail  to  enrich  the  community  seeks 
to  market  its  wares —  i.  e.,  its  securities —  and 
thereby  enable  itself  to  do  business,  where  else  is 
it  to  turn  save  to  the  Stock  Exchange,  and  how 
is  it  to  fix  an  attractive  market  price  at  the  outset 
save  by  what  is  termed  manipulation?  Nobody 
is  compelled  to  buy;  as  for  selling,  any  holder 
of  100  shares  or  any  other  number  of  shares  can 
sell  them  at  will,  and  no  amount  of  manipulation 
can  prevent  him  from  a  free  exercise  of  this 
privilege.  You  may  depend  upon  it,  Mr.  Critic, 
that  the  Stock  Exchange  will  take  pains  to  sup- 
press all  forms  of  manipulation  that  are  unsound 


CAUTIONS  AND  PRECAUTIONS  173 

and  harmful,  but  until  you  or  some  other  gifted 
student  of  economics  can  devise  a  method  by 
which  capital  may  be  attracted  to  excellent  chan- 
nels other  than  through  the  medium  of  an  Ex- 
change, manipulation  of  the  sort  just  described 
must  continue  or  enterprise  must  stop.  Strike 
Dut  the  word  "manipulation,"  and  substitute 
"establishment  of  values"  in  transactions  of  this 
sort,  and  the  practice  seems  to. become,  as  it  really 
is,  in  keeping  with  the  finest  traditions  of  the 
market-place.' 


* 


*  "If  there  is  one  man  who  really  understands  the  nature  of  the  transac- 
tions in  the  New  York  Stock  Exchange  from  day  to  day,  it  is  Robert  L. 
Doremus,  the  chairman  of  the  Stock  Exchange  Clearing  House  Committee, 
which  has  the  power  to  lay  bare  the  character  of  any  broker's  business. 
His  reputation  for  veracity  is  of  that  high  character  whicii  Wall  Street 
demands  from  the  men  in  its  responsible  positions.  When  he  says  that 
the  main  influence  in  any  day's  trading  is  a  legitimate  and  widespread 
demand  for  sound  securities,  in  lots  small  enough  to  be  within  reach  of  the 
investor  of  moderate  means,  he  is  talking  facts  and  not  theories. 

"Our  politicians,  however,  are  legislating  for  a  Wall  Street  of  twenty 
years  ago.  The  stock  market  is  not  controlled  by  large  speculators  creating 
deceptive  prices  by  manipulative  orders.  That  kind  of  business  is  passing 
away,  and  it  may  be  said  that  another  kind,  that  of  the  purely  gambling 
accounts  carried  on  the  lightest  of  margins,  has  practically  gone,  and  is 
not  likely  to  return.  The  few  houses  whose  business  is  still  of  this  character 
are  dying  of  dry-rot;  while  the  active  houses  who  are  doing  the  real  business 
of  the  stock  market  report  their  speculative  accounts  so  broadly  margined 
as  to  be  of  a  semi-investment  character. 

"What  is  still  more  satisfactory  is  the  wide  diffusion  in  the  ownership 
of  industrial  and  railroad  stocks.  This  is  not  new.  The  Illinois  Central's 
great  strength  for  forty  years  was  in  the  small  stockholder,  who  made  his 
voice  heard  to  some  purpose  when  "strike"  legislation  developed  in  his 
State  legislature  or  in  Congress.  But  the  ever-widening  character  of  the 
investment  area,  the  recognition  of  the  convenience  and  convertibility 
of  Stock  Exchange  securities,  safeguarded  by  sound  management  and  full 
publicity,  is  a  growth  of  the  most  hopeful  character.  It  indicates  a  force 
of  enlightened  conservatism  of  the  greatest  value  to  the  country." —  The 
Wall  Street  Journal,  October  22,  19 12. 


174    THE  STOCK  EXCHANGE  FROM  WITHIN 

It  is  a  difficult  matter  for  the  Stock  Exchange 
authorities  to  suppress  all  forms  of  manipulation 
that  are  plainly  and  admittedly  improper.  Such 
things  do  exist;  the  difficulty  is  in  devising  ways 
and  means  of  preventing  them.  Mr.  Smith,  a 
non-member  of  the  Exchange,  may  be  interested 
in  a  certain  security  to  which  he  wishes  to  give 
an  appearance  of  activity.  He  calls  Brown,  a 
stockbroker,  and  instructs  him  to  buy  5000  shares 
*'at  the  market."  Then  he  telephones  Jones, 
another  stockbroker,  to  sell  5000  shares.  Brown 
and  Jones  are  each  in  ignorance  of  the  other's 
order,  but  they  meet  in  the  crowd  where  this 
stock  is  dealt  in,  and  their  orders  combine  to  give 
the  market  an  appearance  of  animation.  The 
governors  are  as  determined  to  stop  this  sort  of 
thing  as  the  most  energetic  critic  could  wish; 
they  send  for  the  two  brokers  and  the  facts  are 
revealed.  But  as  each  was  entirely  innocent  of 
wrongdoing,  and  as  no  rule  of  the  Exchange  and 
no  law  of  the  land  has  been  violated,  what  is  to 
be  done  ? 

They  may  caution  both  brokers  against  accept- 
ing any  more  business  from  Smith,  but  Smith  is 
not  a  member  of  the  Exchange,  and  hence  he 
is  not  amenable  to  its  discipline.  When  his  next 
orders  are  refused  he  gives  them  to  some  one 
else,  and   if  the  entire  Stock  Exchange  refused 


CAUTIONS  AND  PRECAUTIONS  175 

to  accept  business  from  him  he  would  and  could 
with  perfect  propriety  ask  his  bank,  or  a  trust 
company,  or  an  individual  to  give  out  the  orders 
under  their  own  names.  Finally,  if  the  Exchange 
authorities  were  so  sagacious  as  to  be  able  to 
close  to  this  man  every  conceivable  avenue  by 
which  he  might  approach  the  Stock  Exchange  in 
New  York,  there  would  still  be  left  open  to  him 
the  market  in  Boston,  or  Montreal,  or  London, 
or  any  other  centre  in  which  the  security  was 
listed,  and  the  pernicious  effect  of  his  manipulation 
in  these  cities  would  be  felt  in  New  York  just  as 
promptly  and  just  as  harmfully  as  if  they  had 
originated  here.  I  mention  this  case,  a  purely 
hypothetical  one,  to  show  how  easy  it  is  for  manip- 
ulation of  this  sort  to  find  employment,  despite 
all  that  may  be  done  to  suppress  it.  Perhaps 
somewhere  in  the  noble  army  of  critics  there  may 
be  one  who  can  devise  a  means  of  meeting  this 
issue.  If  so,  let  him  stand  forth  and  speak.  The 
Stock  Exchange,  root,  stock,  and  branch,  will 
be  glad  to  hear  from  him.* 

Counsel  for  the  Congressional  Committee  that 


*  It  is  truthfully  declared  by  Courtois,  in  his  Traiie  des  Operations  de 
Bourse  et  de  Change,  that  a  fictitious  movement,  even  on  the  part  of  the 
most  powerful  operators,  cannot  overcome  the  natural  tendencies  of  values, 
and  that  the  most  that  can  be  accomplished  is  sometimes  to  hasten  or 
retard  slightly  the  certain  effect  of  a  foreseen  event.  "Wall  Street  and 
the  Country,"  by  Charles  A.  Conant,  p.  88,  G.  P.  Putnam's  Sons,  New- 
York,  I90(j 


176    THE  STOCK  EXCHANGE  FROM  WITHIN 

is  in  session  as  these  lines  are  written  seeks  to 
raise  another  dreadful  ghost  with  which  to 
frighten  ignorant  people  in  his  alleged  "discovery" 
that  a  great  part  of  the  business  done  on  the 
Stock  Exchange  is  speculation.  He  parades 
through  the  newspapers  the  fact  that  the  number 
of  shares  bought  and  sold  often  largely  exceeds 
the  number  transferred  on  the  companies'  books. 
In  a  chapter  on  "The  Uses  and  Abuses  of  Specu- 
lation," I  have  attempted  to  show  that  the  more 
speculators  there  are  in  a  market,  the  better  and 
safer  the  market,  and  I  rest  this  dictum  on  the 
authority  of  every  student  of  modern  markets. 
In  this  connection  let  us  consider  the  opinion  of 
a  thoughtful  newspaper  writer.  "There  is  no 
doubt,"  he  says,  "that  the  committee  will  find 
that  there  is  speculation  in  Wall  Street,  just 
as  there  is  speculation  elsewhere,  and  in  com- 
modities other  than  in  stocks  and  bonds.  The 
instinct  has  always  been  a  pronounced  human 
characteristic,  being  a  part  of  human  progress, 
and  the  manifestation  of  it  is  one  sign  of  the 
difference  between  man  and  the  lower  sorts  of 
creatures.  It  is  doubtful  whether  the  general 
gambling  impulse  can  be  entirely  wiped  out, 
even  if  the  mighty  power  of  an  act  of  Congress  be 
called  into  requisition.  If  Mr.  Pujo  and  his 
committee  can  abolish  speculation  in  Wall  Street 


CAUTIONS  AND  PRECAUTIONS  177 

(to  say  nothing  of  gambling,  which  is  not  the 
same  thing),  they  may  be  asked  to  abolish  every 
commodity  market  throughout  the  land,  for 
there  is  plentiful  speculation  in  all  of  them. 

"What  seems  to  bother  some  representatives 
of  the  Pujo  Committee  is  that  the  number  of 
shares  traded  in  on  the  Stock  Exchange  exceeds 
largely  the  number  actually  transferred.  It  is 
true,  for  example,  that  the  number  of  shares 
of  United  States  Steel  common  sold  during 
last  year  were  largely  in  excess  of  the  number 
of  shares  outstanding,  the  sales  amounting  to 
31,266,208  shares,  while  the  entire  number  out- 
standing was  only  5,084,952.  The  ratio  of  six 
to  one  suggests  healthy  activity  in  the  market 
for  steel  stocks.  It  is  conceivable  that  a  block 
of  stocks  may  pass  through  many  hands  before 
it  arrives  at  its  ultimate  owner,  just  as  a  crop 
of  potatoes  passes  through  a  long  chain  of  handlers 
and  buyers  and  dealers  before  it  reaches  the  ulti- 
mate consumer.  Meantime,  the  number  of  pota- 
toes has  neither  increased  nor  diminished. 

"But  the  potato  crop,  which  easily  changes 
hands  six  times  in  a  year,  is  finally  eaten.  The 
stocks  go  on  forever.  The  legitimate  holder  is 
not  injured  if  they  change  hands  not  six,  but  sixty 
times,  provided  he  is  secured  by  proper  publicity, 
which    the    Stock   Exchange    assures.      The    free 


178    THE  STOCK  EXCHANGE  FROM  WITHIN 

speculative  market  Is  in  itself  an  element  of 
value,  and  if  it  were  destroyed  the  investor  would 
be  chiefly  injured,  while  future  capitalization 
for  the  development  of  the  country  would  be 
paralyzed."* 

At  the  outset  I  began  by  cautioning  the  reader 
not  to  cry  out  in  alarm  over  the  utterances  of 
newspaper  statesmen  bent  on  justifying  their 
existence,  and  determined  to  make  the  punish- 
ment fit  the  crime.  Stocks  will  always  be  bought 
and  sold,  they  will  pass  from  hand  to  hand  just 
as  horses  are  traded  and  lands  are  exchanged. 
The  modest  dollar,  too,  will  continue  to  pass 
from  pocket  to  pocket,  having  a  thousand  owners 
and  performing  a  thousand  functions  many  of 
which  may  alarm  a  timid  and  unsuspecting  law- 
maker, but  which  to  you  and  me  may  seem  natural 
enough. 

When  you  read  that  a  great  Congressman 
is  determined  to  put  the  Steel  corporation  into 
bankruptcy  and  throw  its  250,000  employees  out 
of  business,  depend  upon  it  he  is  only  trying  to 
justify  his  job  for  the  benefit  of  this  constituents. 
When  somebody  else  seeks  to  mend  his  fences  by 
the  noisy  announcement  that  the  Stock  Exchange 
reeks  with  improper  manipulation,  that  specula- 
tion is  wrongful,  and  that  the  criminal  nature  of  an 

*  The  Wall  Street  Journal,  December  7,  1912- 


CAUTIONS  AND  PRECAUTIONS  179 

Institution  is  directly  proportionate  to  its  size, 
remember  that  the  votes  of  your  fellow-citizens 
put  this  man  in  office  and  that  you  and  they  must 
foot  the  bill,  since  it  is  your  money  that  pays  for 
all  these  junkets,  all  these  investigations,  and 
all  these  political  excursions.  More  than  that, 
you  must  pay  your  share  of  the  $160,000,000  for 
pensions,  of  the  $40,000,000  for  post-offices,  and 
of  the  countless  millions  for  rivers  and  harbors, 
and  these,  too,  are  voted  with  amiable  frugality 
by  the  gentlemen  who  see  nightmares  in  banks, 
Clearing  Houses,  and  Stock  Exchanges. 

Finally,  try  to  investigate  and  study  all  these 
matters  for  yourself.  Read  the  men  who  have 
spent  their  lives  in  the  study  of  economics.  Com- 
pare the  results  attained  by  our  great  financial 
Institutions  with  those  reached  in  similar  lines 
abroad.  In  the  particular  application  of  these 
studies  to  the  New  York  Stock  Exchange,  you 
will  find  that  charges  such  as  we  have  been  con- 
sidering could  be  brought  against  any  Institu- 
tion that  has  stood  the  test  of  time  and  made  the 
mistakes  that  fallible  human  beings  must  make. 
You  will  find  that  If  changes  and  improvements 
seem  to  come  about  slowly  it  is  not  because  of 
the  unwillingness  of  the  Exchange  to  remedy 
these  conditions,  but  because  of  the  gravity  and 
deliberation   with    which    they   must   be   consid- 


i8o  THE  STOCK  EXCHANGE  FROM  WITHIN 

ered   In   the   light  of  the   future   as   well   as  the 
present. 

The  management  and  control  of  a  great  public 
business,  especially  one  that  has  long  survived 
public  criticism,  is  no  light  matter.  It  requires 
more  than  common  industry,  and  more  than  com- 
mon ability.  What  the  Stock  Exchange  asks  of 
you  and  of  every  thoughtful  citizen  in  the  land 
is  a  recognition  of  these  matters,  and  a  patient 
survey  of  all  that  enters  into  them.  The  critic 
in  "The  Vicar  of  Wakefield"  laid  it  down  as  a 
good  rule  that  you  should  always  say  the  picture 
would  have  been  a  better  one  if  the  artist  had 
taken  more  time.  Criticism  offered  in  this  spirit 
the  members  of  the  Stock  Exchange  can  bear  with 
good  humor.  What  hurts  them  on  the  raw  is 
the  critic's  failure  to  study  and  investigate,  or, 
getting  back  to  the  text  of  Mr.  Bryce's  sermon, 
**the  neglect  to  think." 


CHAPTER  VI 

PANICS,    AND    THE    CRISIS    OF    I907 


CHAPTER  VI 

PANICS,  AND   THE    CRISIS    OF    I9O7 

A  PANIC  is  a  State  of  mind.  It  cannot  be  regulated 
by  statute  law  nor  preached  down  by  press  or 
pulpit.  At  such  times,  suspicion,  apprehension, 
and  alarm  take  possession;  reflection  and  sobriety 
are  crowded  out;  men  do  and  say  irrational  and 
unreasoning  things;  incidents  trifling  in  themselves 
are  exaggerated  into  undue  proportions;  all  kinds 
of  difficulties  are  conjured  into  the  imagination. 
The  best  that  can  be  said  of  such  a  phenomenon 
is  that  it  is  of  brief  duration.* 

In  Wall  Street,  where  men  are  accustomed  to 
looking  forward  at  all  times,  the  question  is  ever 
in  mind  as  to  the  next  panic.  The  last  one  left 
its  sting;  we  are  interested  now  in  knowing  about 

*The  distinction  between  "panics,"  "crises,"  and  "depressions,"  are 
clearly  stated  in  the  opening  chapter  of  "Financial  Crises  and  Periods 
of  Industrial  and  Commercial  Depression,"  by  Theodore  E.  Burton,  D. 
Appleton  &  Co.,  N.  Y.,  1902.  In  the  following  pages,  I  use  the  terms  as 
they  are  commonly  applied  in  Wall  Street,  although  this  application  is 
not  always  governed  by  sound  etymology.  Thus  in  Wall  Street  we  speak 
of  "the  panic  of  1907,"  meaning  broadly  the  events  of  that  entire  year. 
Strictly  speaking  a  "panic"  is  the  brief  period  of  a  day  or  an  hour  of 
unreasoning  fear,  brought  about  by  the  "crisis"  of  a  money  scarcity  which 
preceded  it.  The  period  of  commercial  and  financial  suffering,  which  con- 
tinues after  the  panic  and  the  crisis  have  passed,  is  the  "depression." 

183 


i84    THE  STOCK  EXCHANGE  FROM  WITHIN 

the  future.  Have  we  learned  how  to  avoid  these 
difficulties?  May  we  hope  to  diminish  their  force 
and  mitigate  their  terrors?  May  we  rely  upon 
the  superior  organization  of  business  and  the 
greater  quantity  and  quality  of  capital  to  soften 
the  effect  of  the  next  shock?  I  think  not.  We 
may  lull  ourselves  into  a  coma  of  fancied  security 
as  we  reflect  upon  experience  and  Its  expensive 
lessons,  but  we  deceive  ourselves  If  we  think  that 
we  shall  finally  arrive  at  a  point  where  these 
convulsions  shall  cease. 

Nothing  of  that  sort  can  come  about  among 
people  strong  with  health  and  vigor,  confident  and 
full  of  energy,  and  Impatient  for  action.  With 
such  a  people  life  is  incessantly  mobile;  a  con- 
stantly Increasing  volume  of  creative  activity 
impels  them  onward.  Panics  are  unknown  in 
dead  countries  and  In  countries  that  have  not  yet 
heard  the  call  of  progress;  In  all  other  countries 
the  violence  of  these  shocks  is  directly  propor- 
tionate to  the  enterprise  of  the  people.  The  more 
civilization  there  Is,  the  greater  the  creation  of 
wealth;  the  more  wealth  there  Is,  the  greater  the 
volume  of  speculation  that  creates  wealth.  In 
such  circumstances  It  is  Idle  to  talk  of  a  time 
when  panics  shall  cease,  because  confidence  and 
enterprise  must  ever  push  onward,  speculation  in 
material    things   must   accompany   them,    supply 


PANICS,  AND  THE  CRISIS  OF  1907        185 

must  overtake  demand,  and  human  nature  with 
its  moods  and  caprices  must  finally  pay  toll. 

Vast  industrial,  commercial,  and  credit  expan- 
sions lie  somewhere  ahead,  and  somewhere  ahead 
excesses  and  indiscretions  the  world  over  must 
play  their  part  and  exact  their  penalties.  We 
should  cease  to  be  surprised  at  these  vicissitudes, 
for,  "paradoxical  as  it  may  seem,  the  riches  of 
nations  can  be  measured  by  the  violence  of  the 
crises  which  they  experience.  "*  Moreover,  panics 
are  rarely  such  unmitigated  calamities  as  they  are 
pictured  by  those  who  experience  them.  At  least 
they  serve  to  place  automatic  checks  upon  extrava- 
gance and  inflation,  restoring  prices  to  proper 
levels  and  chastening  the  spirit  of  over-optimism. 
In  a  world  of  swift  changes  they  are  soon  for- 
gotten. 

We  may  seem  to  be  prepared  for  these  periodic 
set-backs,  and  there  may  be  men  amongst  us 
of  sober  reflection  who  are  really  wise  enough  to 
foresee  the  top  to  a  normal  movement,  yet  the 
accidents  that  have  happened  will  happen  again, 

—  bad  harvests,  war,  sudden  failures,  earthquakes, 

—  these  are  not  easily  discerned  in  advance. 
Sanguine  and  ardent  merchants  will  make  the 
same  old  mistakes;  good  times  will  engender  the 
same  old  hallucinations;  people  who  see,  or  think 

*  "Des  Crises  Commerciales,"  Clement  Juglar,  Paris,  1889,  pp.  44-5. 


i86    THE  STOCK  EXCHANGE  FROM  WITHIN 

they  see,  wealth  being  created  all  around  them, 
will  always  rush  in  and  buy  at  the  top;  there  will 
be  too  much  work  for  the  dollar  to  do  —  and  after 
that  the  deluge.  Finally,  in  order  that  we  may 
not  become  pessimists,  let  us  remember  the  words 
of  the  greatest  of  American  philosophers:  "The 
changes  that  break  up  at  short  intervals  the 
prosperity  of  man  are  but  advertisements  of  a 
nature  whose  law  is  growth." 

Another  phenomenon  quite  as  curious  as  that 
of  panics,  and  one  that  is  similarly  psychological, 
is  the  unhesitating,  slam-bang  zeal  with  which 
we  place  the  responsibility  for  these  misfortunes 
on  the  shoulders  of  others.  We,  as  a  people, 
have  brought  the  disaster  upon  ourselves  by 
reason  of  our  indiscretions.  We  have  lost  our 
heads  and  entangled  ourselves  in  a  mesh  of  follies. 
But  we  do  not  admit  such  reproaches,  even  In 
our  communings  with  self.  Not  at  all.  The 
fault  lies  elsewhere,  and  it  is  balm  to  our  bruises 
to  place  it  elsewhere  with  indignant  energy. 
It  will  not  do  to  preach  at  such  times  about 
currency  systems,  laws  of  supply  and  demand  and 
kindred  generalities,  for  these  are  abstract  and 
vague  to  a  mind  inflamed  by  losses.  What  such 
a  man  wants  is  a  head  to  hit;  something  concrete, 
a  target  for  his  exploding  wrath.  And  he  never 
hesitates.      He    says    Wall    Street    did    it.     His 


PANICS,  AND  THE  CRISIS  OF  1907        187 

fathers  said  the  same  thing,  and  his  children  will 
follow  suit.. 

Now  here  is  a  strange  thing.  After  a  man  has 
said,  "Wall  Street  did  it"  over  and  over  again,  he 
believes  it,  just  as  he  believes  or  takes  for  granted 
a  similar  tedious  reiteration  by  the  humble 
katydid.  To  such  a  man,  the  thing  he  wants  to 
believe,  when  stated  over  and  over  again,  comes 
by  repetition  to  fix  itself  in  the  mind  as  a  demon- 
strated truth,  notwithstanding  an  utter  absence 
of  proof  or  of  reasoning.  He  says  "Wall  Street," 
or  "the  Stock  Exchange,"  until  he  can  think  of 
nothing  else.  It  is  a  catch-phrase,  short  and 
sweet,  which  he  hammers  home  to  his  own  ineffable 
satisfaction,  and  he  thinks  it  and  broods  over  it 
to  his  heart's  content.  The  politician  then  comes 
along  with  his  cures  for  all  the  ills  of  society,  and, 
finding  Wall  Street  a  convenient  means  of  per- 
petuating his  accidental  notoriety,  his  voice  joins 
the  harmony.     The  indictment  is  then  complete. 

Take  the  panic  of  1907  as  the  last  and  most 
conspicuous  example.  The  financial  losses  in- 
volved, and  the  extent  of  the  disturbance  of  the 
machinery  of  credit,  made  it  the  worst  panic  of 
this  generation.  As  it  burst  upon  the  country 
at  a  period  when  to  the  outward  eye  prosperity 
reigned  throughout  the  land,  men  were  at  a  loss 
to  explain  it.     They  could  not  understand  how 


1 88    THE  STOCK  EXCHANGE  FROM  WITHIN 

such  appalling  conditions  could  occur  in  such 
apparently  cheerful  surroundings.  As  everybody 
was  affected  by  it  in  greater  or  less  degree  the 
whole  country  was  full  of  people  with  a  grievance. 
They  were  themselves  directly  to  blame  for  it,  but 
they  looked  elsewhere  for  the  responsibility  for 
their  folly. 

That  sinister  influences  were  at  work  was,  in 
the  popular  mind,  undeniable;  and  by  that 
same  token  we  are  pretty  close  to  "Wall  Street" 
when  we  talk  of  things  sinister.  At  about  that 
time  a  member  of  Congress  made  a  speech  in 
which  he  asserted,  with  all  the  art  of  katydid 
repetition  so  dear  to  the  heart  of  the  true  believer, 
that  the  Stock  Exchange  was  the  cause  of  the 
panic.  Rich  men  broke  the  market  and  "held 
the  bag,"  he  said,  while  panic-stricken  owners 
of  property  poured  the  invested  savings  of  a  life- 
time into  that  capacious  receptacle.  Nothing 
could  be  simpler.  Newspapers  must  print  such 
things,  and  the  public  found  what  it  wanted  on 
the  first  page.  Even  to-day,  five  years  after  the 
fact,  this  delightful  explanation  of  the  1907  panic 
blossoms  like  the  rose  as  a  political  campaign 
progresses.  The  voice  of  the  hustings  "knows 
its  business." 

Mr.  John  Burroughs  warns  us  that  it  is  one  thing 
to  treat  your  facts  with  imagination,  but  quite 


PANICS,  AND  THE  CRISIS  OF  1907        189 

another  thing  to  imagine  your  facts.  Sufficient 
time  has  elapsed  since  1907  to  soften,  somewhat, 
the  bias  and  prejudice  created  by  the  events  of 
that  year,  and  perhaps  there  may  be  among  us 
minds  open  to  reason.  The  New  York  Stock 
Exchange  feels,  honestly,  that  a  great  injustice 
was  done  it  by  the  criticism  and  abuse  so  gener- 
ously poured  out  in  the  first  shock  of  that  event. 
Far  from  causing  the  crisis,  its  members  assert 
that  the  institution  fulfilled  one  of  its  most  useful 
functions  in  giving  ample  warning  of  its  approach, 
and  that,  when  those  warnings  were  disregarded, 
it  concentrated  all  its  machinery  on  the  task  of 
restoring  order  from  chaos.  They  speak  feelingly 
when  they  say  that  never  in  its  history  has  the 
Stock  Exchange  been  called  upon  to  deal  with  so 
great  an  emergency,  and  never  has  it  demonstrated 
so  admirably  its  fundamental  purposes.  When 
they  make  these  statements  they  offer  to  prove 
them.     Let  us  examine  the  proofs. 

The  panic  of  1907  was  not  unlike  many  preced- 
ing financial  disturbances.  The  opening  months 
of  the  year  had  witnessed  a  general  liquidation  on 
the  Stock  Exchange,  brought  about  naturally,  and 
in  simple,  automatic  compliance  with  economic 
laws  and  precedents.  There  had  been  over- 
expansion  in  all  lines  of  business;  careful  students 
saw  the  portent;  able  men  of  power  and  influence 


iQo   THE  STOCK  EXCHANGE  FROM  WITHIN 

heeded  its  warning  and  set  corrective  forces  in 
motion  months  before  the  shock  came.  Total 
transactions  in  shares  sold  on  the  Stock  Exchange 
had  risen  from  187  millions  in  1904  to  284  millions 
in  1906,  while  the  value  of  the  securities  thus  sold 
increased  from  12,061  to  23,393  millions  of  dollars 
respectively.  This  was  too  rapid  growth,  and  the 
general  liquidation  that  had  been  under  way  for 
months  effectually  corrected  it,  since  New  York 
City  bank  loans  secured  by  Stock  Exchange 
collateral  declined,  as  shown  by  the  Comptroller's 
report,  from  $385,652,014  in  August,  1905,  to 
$251,867,158  in  August,  1907  —  a  corrective  force 
represented  by  $133,784,856. 

The  Stock  Exchange  has  been  defined  as  "a 
barometer  of  future  business  conditions,"  and 
never  did  a  barometer  give  clearer  warning. 
It  said  in  effect  to  all  the  banks  of  the  country 
and  to  business  men  generally:  "There  has  been 
a  widespread  over-expansion  of  credit;  it  must 
stop;  we  are  doing  our  share  here  in  New  York 
to  correct  it;  you  must  do  likewise."  And,  in 
order  that  there  might  be  no  failure  to  understand 
what  was  meant.  New  York  City  bank  loans  were 
reduced  with  drastic  emphasis,  months  before  the 
panic  came,  by  nearly  35  per  cent.  "Without  an 
exception,"  writes  Prof.  S.  S.  Huebner,  "every 
business    depression    in    this    country    has    been 


PANICS,  AND  THE  CRISIS  OF  1907        191 

discounted  In  our  security  markets  from  six 
months  to  two  years  before  the  depression  became 
a  reality."*  Senator  Burton,  another  authority, 
emphasizes  the  point  further:  "In  addition  to 
other  Influences  which  promote  an  earlier  rise 
and  fall,  there  must  be  mentioned  the  more  careful 
study  and  attention  to  the  financial  situation 
which  Is  given  by  dealers  In  the  stock  markets  and 
In  great  financial  centres.  They  often  forecast 
the  grounds  for  a  rise  or  fall  In  prices  before  the 
general  public  Is  awake  to  the  situation."!  This, 
then,  was  the  situation  In  the  summer  of  1907. 
The  Stock  Exchange  had  "cleaned  house,"  and 
had  liquidated  thoroughly,  warning  the  country 
to  go  slow. 

Why  was  not  this  warning  heeded.^  I  recall 
vividly  the  dally  expression  of  surprise,  on  the 
floor  of  the  Exchange,  and  throughout  the  finan- 
cial district.  In  the  months  that  elapsed  between 
our  March  liquidation  and  the  outbreak  of  the 
October  panic,  that  the  country  should  pay  so 
little  attention  to  "Wall  Street's"  admonition; 
that  it  should  continue  its  unprecedented  boom 
despite  the  plain  intimation  that  the  funds  to 
support  It  were  exhausted,  and  despite  the  general 


*  "Annals  of  the  American  Academy  of  Political  and  Social  Science," 
Vol.  XXXV,  No.  3,  May,  1910,  p.  13. 

f  "Financial  Crises  and  Periods  of  Industrial  and  Commercial  Depres- 
sion," Theodore  E.  Burton,  New  York,  1902,  p.  234. 


192  THE  STOCK  EXCHANGE  FROM  WITHIN 

knowledge  of  every  tyro  in  business  that  future 
conditions  are  discounted  in  Wall  Street  as  freely 
as  promissory  notes. 

Had  the  business  interests  of  the  country  so 
much  as  inquired  into  that  warning  they  would 
have  found  by  turning  to  the  Comptroller's 
reports  of  the  loans  of  national  banks  for  the 
entire  country  that  such  loans  had  expanded  from 
^3,726  millions  in  1904  to  ^4,679  millions  in  1907. 
They  would  have  seen  that  whereas  the  New 
York  City  banks  contracted  their  loans  by  nearly 
$134,000,000  from  August,  1905,  to  August,  1907, 
loans  and  discounts  by  the  banks  of  the 
whole  country  in  that  period  actually  expanded 
$700,000,000.  Surely  it  will  not  be  urged  that 
Wall  Street  or  the  Stock  Exchange  had  anything 
to  do  with  bringing  about  this  expansion.  On  the 
contrary,  it  shows  that  speculation  in  commer- 
cial lines,  in  new  enterprises,  in  lands  and  in  all 
the  various  forms  that  "out-of-town"  banks  are 
expected  to  finance,  went  on  and  on  in  vastly  in- 
creasing volume  long  after  the  danger  signal  had 
been  hoisted  on  the  Stock  Exchange,  and  in  utter 
disregard  of  the  warnings  those  signals  conveyed.* 


*  The  report  of  the  New  York  State  Superintendent  of  Banks  for  the 
same  period  emphasizes  this  point  by  showing  a  steady  contraction  of 
loans  by  State  banks  and  trust  companies  of  New  York  City  during  the 
period  quoted,  while  all  other  authorities  reveal  a  steady  expansion  in 
loans  by  similar  institutions  outside  the  city. 


PANICS,  AND  THE  CRISIS  OF  1967        193 

As  the  summer  of  1907  advanced,  speculation 
throughout,  the  country  continued  in  rapidly 
increasing  volume,  while  on  the  Stock  Exchange 
there  was  an  almost  complete  cessation  of  ac- 
tivity. Business  men  of  the  West  and  South 
seemed  to  feel  that  as  there  had  been  no  serious 
failures,  and  as  the  decline  in  the  stock  market 
had  restored  values  to  an  attractively  low  basis, 
there  would  be  a  normal  recovery  similar  to 
that  which  followed  the  panic  of  1893.  They 
felt  that  the  trouble,  whatever  it  was,  had  now 
been  corrected,  and  in  this  fancied  security  they 
went  about  with  further  expansion  of  their 
business  enterprises,  confident  that  no  serious 
difficulties  were  in  store.  The  Stock  Exchange 
was  often  cynically  referred  to  in  that  period  as 
*'the  only  blue  spot  on  the  map."  Its  members 
were  cheerfully  invited  by  a  Western  newspaper 
to  "shake  off  their  torpor  and  join  the  Sunshine 
movement. " 

It  is  only  fair  to  say  that  there  was  some  force 
in  the  buoyant  if  superficial  viewpoint  of  the 
country  at  large,  for  in  the  autumn  of  1907  we 
were  blessed  with  all  the  kindly  fruits  of  the 
earth  in  abundance.  The  average  crop  of  our 
agricultural  products  gathered  that  year  was 
enormous,  and  behind  it  lay  large  reserves  of 
wealth  that  had  accumulated  from  a  series  of  good 


194  THE  STOCK  EXCHANGE  FROM  WITHIN 

crops  in  the  years  just  preceding.  There  was, 
moreover,  a  partial  failure  of  foreign  crops  that 
brought  about  heavy  foreign  requirements,  thus 
assuring  rich  returns  to  American  producers. 
Our  railroads,  which  in  the  previous  panic  of  1893 
were  so  affected  by  declining  traffic  and  by  the 
unproductiveness  of  new  territory  into  which 
they  had  ventured  that  bankruptcies  became 
general,  were  early  in  1907  in  better  physical 
condition  than  ever  before.  Their  gross  earnings 
were  at  a  maximum;  their  surpluses  fat  with  the 
profits  of  recent  years;  their  credit  high.  A  long 
accumulation  of  foreign-trade  balances  had  made 
the  inherent  strength  of  the  nation  greater  than 
ever  before.  Finally  there  was  the  great  essential 
difference  between  1907  and  former  years  in  that 
we  were  now,  by  statute  law  as  well  as  in  fact, 
on  a  gold-standard  basis. 

And  yet,  without  one  unsound  basic  factor 
visible  to  superficial  observers,  we  were  suddenly 
plunged  into  a  grave  disaster  —  a  panic  which  in 
actual  money  losses  surpassed  any  of  its  predeces- 
sors. It  came,  this  cataclysm  (as  the  Stock  Ex- 
change had  vainly  predicted  six  months  earlier), 
at  the  worst  time  it  could  possibly  come,  just 
when  the  banks  were  called  upon  to  furnish 
$200,000,000  to  transport  and  market  the  crops. 
Small  wonder  that  in  the  face  of  such  an  optimistic 


PANICS,  AND  THE  CRISIS  OF  1907        195 

outlook  men  stood  aghast  at  the  violence  of  the 
panic.  As  they  had  not  understood  the  warning, 
so  they  could  not  understand  its  swift  fulfilment. 
In  all  the  long  processions  of  panic-stricken  people 
who  stood  in  line  at  the  banks  in  those  trying  days, 
not  one  in  a  hundred  could  understand  how  an 
Institution  could  be  solvent  and  yet  be  forced  to 
suspend.  Later  on,  smarting  from  losses,  this 
bewilderment  gave  way  to  distrust  and  suspicion, 
as  is  often  the  case,  humanly  speaking,  when  men 
look  elsewhere  than  to  their  own  folly  for  the 
sources  of  their  misfortunes.  They  were  in  a 
receptive  mood  when  the  charge  was  made  that 
"Wall  Street  and  the  Stock  Exchange"  had 
brought  about  all  this  misery;  they  believed  it  to 
be  true,  and  many  still  believe  it. 

The  charge  was  so  widely  circulated  and  was 
fraught  with  such  possibilities  of  mischief  that 
there  was  danger  of  ill-considered  legislation 
directed  against  the  Stock  Exchange  and  sup- 
ported by  ill-advised  public  opinion.  Thus  it  hap- 
pened that  Governor  Hughes  of  New  York,  doubt- 
less moved  to  forestall  hasty  law-making,  appointed 
a  committee  to  investigate  the  Stock  Exchange. 
In  another  chapter  we  have  reviewed  the  work  of 
this  commission;  meantime,  the  words  of  its  chair- 
man are  quoted,  in  passing,  as  a  sort  of  ex  post  facto 
reply  to  the  outcry  that  "Wall  Street  did  it." 


196  THE  STOCK  EXCHANGE  FROM  WITHIN 

"The  immediate  cause  of  the  panic,"  he  says, 
"was  a  simultaneous  rush  to  sell  securities,  by 
holders  who  perceived  that  there  was  trouble  in 
the  money  market,  and  who  wanted  cash  to  meet 
maturing  obligations.  These  holders  were  not 
Wall  Street  men  merely,  but  people  in  all  parts  of 
the  country  who  had  invested  some  of  their 
savings  in  stocks  and  bonds.  The  very  raison 
d^etre  of  the  Stock  Exchange  is  to  supply  a  market 
where  Invested  capital  can  be  quickly  turned 
into  cash,  and  vice  versa.  The  remoter  cause 
of  the  panic  was  a  long  course  of  speculation 
in  all  kinds  of  property,  real  and  personal,  that 
had  pervaded  all  parts  of  the  country,  and  many 
parts  of  the  Old  World,  and  had  now  reached  its 
climax."  Mr.  White  here  adds  in  a  footnote 
that  It  has  been  ^^  shown  conclusively  that  speculation 
on  the  Stock  Exchange  was  not  the  chief  contributor 
to  the  collapse  of  igoy^  hut  that  speculation  on  a 
much  wider  scale,  through  the  length  and  breadth 
of  the  land,  was  the  exciting  cause.  "* 

I  have  said  it  was  not  surprising  that  the  public 
failed  to  observe  signs  of  disturbance  in  the  happy 
conditions  that  seemed  to  prevail  before  the  panic. 


*  "The  Hughes  Investigation,"  by  Horace  White,  Journal  of  Political 
Economy  October,  1909,  pp.  528-540  Mr.  White  quotes  in  this  con- 
nection an  article  on  "The  Panic  of  1907,"  by  Eugene  Meyer,  Jr., 
Yale  Review,  May,  1909,  from  which  many  facts  in  this  chapter  have  been 
taken. 


PANICS,  AND  THE  CRISIS  OF  1907        197 

The  blindness  of  the  mass  of  the  people  to  these 
impending  catastrophes  is,  indeed,  a  marked 
characteristic  of  all  similar  epochs.  Let  us  di- 
gress for  a  moment  and  consider  the  history  of 
other  great  disturbances.  In  1825  the  King's 
Speech  as  read  by  the  Lord  Chancellor  dwells  on 
"that  general  and  increasing  prosperity  . 
which,  by  the  blessing  of  Providence,  continues 
to  pervade  every  part  of  the  Kingdom."  This 
was  in  July;  in  December  of  that  year  the  whole 
country  was  torn  by  a  devastating  financial  crisis. 
The  London  Economist,  in  1873,  dwelt  at  length 
on  the  "astounding"  progress  of  the  Austrian 
States,  and  said,  "All  over  the  rich  countries  of 
the  Danube,  capital  and  labor  are  vigorously  at 
work  in  the  discovering  and  turning  to  profit  the 
amazing  resources  which  have  been  lying  unheeded 
for  centuries."  This  was  written  in  March;  the 
Bourse  at  Vienna  closed  its  doors  May  9th,  and 
a  panic  of  exceptional  severity  was  followed  by 
long  and  continued  depression.  On  December  31, 
1892,  R.  G.  Dun  &  Company's  Weekly  Review  of 
Trade  said:  "The  most  prosperous  year  ever 
known  in  business  closes  to-day  with  strongly 
favorable  indications  for  the  future,"  and  yet 
four  months  later  the  storm  burst.* 

These  instances  go  to  show  how  the  elect  may 

*  Cf.  Burton,  supra,  pp.  49-50-51. 


iqs  the  stock  exchange  from  within 

err  In  estimating  conditions,  despite  the  fact  that 
in  two  of  these  three  memorable  crises  ample 
warnings  of  an  impending  catastrophe  were 
proclaimed  in  the  stock  market  long  before  these 
prophecies  of  continued  expansion  were  printed. 
In  each  instance  the  portent  was  ignored;  in  each 
the  ultimate  penalty  was  paid.  So  it  was  in  our 
own  great  crisis  of  1907,  and  so  it  will  always  be. 

There  was  a  panic  throughout  the  United 
Kingdom  in  April  and  October  of  1847,  yet  the 
early  response  to  changing  conditions  took  place 
two  years  before,  when  stocks  began  to  fail  in 
July  and  August,  1845.  In  the  year  1857  com- 
merce and  industry  expanded  throughout  America 
in  increasing  volume  up  to  the  very  eve  of  the 
August  crisis,  yet  the  stock  market  in  the  summer 
of  the  preceding  year  gave  clear  warning  of  what 
was  to  occur.  One  year  before  the  panic  of  1873 
a  similar  "slump"  foretold  what  was  coming,  and 
the  same  was  true  of  the  year  preceding  the  panic 
of  '93.*  Previous  to  the  last-mentioned  crisis 
stocks  began  to  fall,  with  unmistakable  emphasis, 
early  in  1892.  Of  seventeen  of  the  most  active, 
five  reached  their  maximum  price  in  January,  1892, 
three  in  February,  four  In  March,  two  —  Lake 
Shore  and  Michigan  Central  —  in  April.  And  as 
we  have  seen,  Identical  preliminary  warnings  de- 

*  Ibid.,  pp.  217-8-9. 


PANICS,  AND  THE  CRISIS  OF  1907        199 

veloped  on  the  Stock  Exchange  from  one  year  to 
six  months  before  the  last  great  panic  of  1907.* 

The  panic  that  hit  the  Paris  Bourse  in  October, 
1912,  causing  a  disturbance  not  equaled  in 
violence  since  1870,  was  brought  about  hy  sowing 
the  wind  through  an  immense  public  speculation 
based  on  two  fine  harvests  in  Russia  and  a  feverish 
revival  of  commercial  and  industrial  activity  all 
over  Europe.  Up  to  this  point  all  the  indicia  of 
the  movement  —  such  as  bank  loans,  building 
operations,  public  and  private  extravagance,  and 

*  The  panic  of  1837  was  caused  by  a  great  expansion  of  banking  and 
bank  credits,  and  an  intense  speculation  in  real  estate.  In  1830  there 
were  329  banks  in  the  country  with  a  capital  of  $110,000,000.  In  1857 
there  were  788  with  a  capital  of  $290,000,000.  When  the  crisis  was  sub- 
sequently examined  it  was  found  that  there  had  been  an  actual  shrinkage 
of  $2,000,000,000  in  the  value  of  the  assets  of  the  country,  and  that 
$600,000,000  of  indebtedness  had  been  wiped  out  by  bankruptcy. 

The  panic  of  1857  was  due  primarily  to  the  influx  of  gold  from  California 
after  its  discovery  in  1848,  and  to  the  intense  passion  for  speculative  gain 
which  attended  it.  Suspension  of  specie  payments  by  the  banks  lasted 
fifty-nine  days.  Complete  recovery  to  the  normal  standard  did  not  take 
place  until  i860,  when  it  was  again  interrupted  by  the  events  antecedent 
to  the  Civil  War  of  1861. 

The  antecedents  of  the  crisis  of  1873  were  identical  with  every  other 
commercial  crisis  —  namely,  speculation  —  the  act  of  buying  with  a  view 
to  selling  at  a  higher  price,  and  overtrading,  or  the  act  of  buying  and  selling 
too  much  on  a  given  capital.  Most  commonly  these  two  elements  are 
accompanied  by  two  others,  viz.  —  the  destruction  or  loss  of  previously 
accumulated  capital,  and  the  rapid  conversion  of  circulating  into  fixed 
capital.  Speculation  and  destruction  of  capital  usually  go  together  in 
preparing  the  way  for  a  crisis.  —  Horace  White,  Fortnightly  Review,  Vol. 
XXV,  p.  819. 

The  panic  of  1893  was  distinctly  a  currency  panic.  By  a  curious  paradox 
it  came  at  a  time  when  the  volume  of  currency  was  unprecedentedly  large 
and  constantly  increasing.  But  the  inception  of  the  disaster  had  to  do 
with  its  quality  rather  than  its  quantity.  The  repeal  of  the  silver  pur- 
chasing clause  of  the  Sherman  Law,  November  I,  1893,  restored  confidence 
by  assuring  the  commercial  world  that  the  existing  volume  of  silver  coin 
would  be  maintained  on  a  parity  with  gold. 


200  THE  STOCK  EXCHANGE  FROM  WITHIN 

a  blind  Infatuation  for  speculation  by  a  normally 
prudent  nation  that  had  not  speculated  on  a  large 
scale  since  the  Panama  debacle  of  1894  —  cor- 
responds exactly  with  conditions  in  America  just 
preceding  the  1907  crisis.  The  similarity  between 
the  two  incidents  goes  even  farther,  for  early  in 
September  of  191 2  the  French  bankers  and 
Agents  de  Change^  recognizing  the  strained  con- 
dition of  credit,  had  deliberately  put  in  motion 
corrective  agencies  designed  to  stop  the  rise  with 
the  least  possible  derangement  of  confidence. 

They  would  have  succeeded,  no  doubt,  and  the 
situation  would  have  exactly  paralleled  our  own 
discounting  processes  of  March,  1907,  but  for  the 
unforeseen  Balkan  difficulty  which,  coming  out 
of  a  clear  sky,  upset  the  plans  of  the  conservative 
financial  forces  and  precipitated  a  panic.  It 
came,  as  a  French  banker  explained,  a  week  too 
soon  —  by  which  he  meant  that,  given  a  little 
more  time,  the  worst  phases  of  the  disturb- 
ance would  have  been  avoided  through  gradual 
and  orderly  liquidation.  As  it  stands,  the  panic 
will  no  doubt  go  down  into  French  financial 
history  as  "the  Balkan  panic,"  just  as  our  dis- 
turbance of  1907  is  ascribed,  faute  de  mieux^  to 
Wall  Street  wickedness;  but  in  reality  both  the 
French  and  American  crises  had  their  origin  in 
precisely   similar   causes.     The   Balkan    news    in 


PANICS,  AND  THE  CRISIS  OF  1907        201 

Paris  only  precipitated  what  the  French  Bourse 
had  planned  to  accomplish  in  an  orderly  manner, 
just  as  Wall  Street  and  the  Stock  Exchange  had 
done  five  years  earlier  in  a  similar  emergency. 
The  essential  lesson  of  both  instances  is  that  the 
same  causes  which  generate  prosperity  will,  if 
pushed  far,  generate  an  equivalent  adversity. 

The  details  of  the  panic  of  1907  are  still  fresh 
in  mind,  and  need  be  but  briefly  referred  to. 
Banks  and  trust  companies  closed  their  doors  and 
suspended  payments  to  depositors.  Cash  and 
credit  became  almost  unobtainable;  we  were 
face  to  face  with  demoralization.  Clearing-house 
certificates  were  resorted  to  at  practically  all 
banking  centres  throughout  the  country;  there 
was  a  general  requirement  of  time  notices  for 
withdrawal  of  savings  bank  deposits;  all  normal 
credit  Instruments  were  Impaired.  The  Secretary 
of  the  Treasury  was  forced  to  exercise  heroic 
discretion  in  the  matter  of  security  for  govern- 
ment deposits  and  for  the  very  necessary  increase 
of  a  note  circulation  that  was  then  suffering  from 
a  spasm  of  contraction.  There  was  an  Immense 
hoarding  of  funds  and  a  consequent  drying  up  of 
fluid  capital,  while  from  one  end  of  the  country 
to  the  other,  there  was  liquidation,  business  con- 
traction, retrenchment,  panic,  and  ruin,  "Wall 
Street"  and  the  Stock    Exchange    had    foreseen 


202  THE  STOCK  EXCHANGE  FROM  WITHIN 

that  the  chain  was  only  as  strong  as  Its  weakest 
link,  and  had  done  what  it  could  to  prepare  the 
public  for  the  break.  To  assert  at  this  late  day 
that  it  did  aught  but  its  full  duty  is  humbug 
in  excelsis. 

I  have  already  cited  one  instance,  the  country's 
expanding  bank  loans  as  contrasted  with  "Wall 
Street's"  contraction,  to  show  how  plainly  the 
warning  was  conveyed.  As  another  instance, 
take  the  immobilization  of  capital  tied  up  in  the 
enormous  real-estate  speculation  then  prevalent. 
In  New  York  City  alone  the  increase  in  mortgages 
recorded  jumped  from  455  millions  in  1904  to  755 
millions  in  1905,  an  increase  over  the  previous 
years  of  32.7  per  cent,  and  66  per  cent,  respec- 
tively.* The  figures  showing  the  increase  in  build- 
ing permits  are  similarly  significant,  revealing  the 
fact  .that  in  1905,  1906,  and  the  early  months  of 
1907,  money  was  pouring  into  new  construction 
at  a  rate  without  precedent.  In  Greater  New 
York  alone,  not  including  Queens  County,  building 
permits  granted  in  1904  amounted  to  ^153,300,000, 
and  in  1905  to  ^229,500,000,  and  in  the  face  of 
disaster  this  rate  of  increase  continued  up  to  the 
very  eve  of  the  panic. f 


*  Real  Estate  Record  and  Guide,  1906-7. 

fConsult  Bradstreet's,  1907;   the  Construction   News,  Chicago,    1907;  the 
Engineering  News,    1907. 


PANICS,  AND  THE  CRISIS  OF  1907        203 

Outside  of  New  York  the  expansion  in  building 
operations  was  equall7  rapid  and  equally  ominous, 
showing  an  increase  in  twenty-five  cities  alone  from 
$201,300,000  in  1903  to  $234,200,000  in  1904,  to 
$280,400,000  in  1905  and  to  $307,800,000  in 
1906  —  all  this  but  a  small  part  of  the  actual 
funds  thus  locked  up  throughout  the  whole 
country.*  We  thus  find  that  one  of  the  most 
important  and  inevitable  causes  of  the  panic  was 
the  absorption  of  exceptionally  large  amounts 
of  capital  in  enterprises  that  required  a  consider- 
able time  for  completion,  or  which,  when  com- 
pleted, were  not  immediately  profitable;  and  to 
them  may  be  added  factories  and  extensive  public 
and  private  works  of  every  kind.  This  form  of 
expansion,  as  Senator  Burton  points  out,  when  car- 
ried to  extremes  almost  invariably  brings  about  a 
disturbance. 

Now  let  us  consider.  Does  all  this  expansion 
of  bank  loans  outside  of  New  York  and  all  this 
tremendous  increase  of  building  operations  show 
that  the  Samsons  of  "Wall  Street"  were  pulling 
down  the  temple  on  their  own  heads  in  order  to 
slaughter  the  Philistines,  as  alleged,  or  does  it 
show  an  indifference  and  lack  of  readjustment  to 
the  growing  stringency  of  money,  as  revealed  by 


*  "The  New  York  Stock  Exchange  and  the  Panic  of  1907,"  by  Eugene  . 
Meyer,  Jr.,  Yale  Review,  May,  1909. 


204  THE  STOCK  EXCHANGE  FROM  WITHIN 

the  Stock  Exchange  In  its  liquidation  of  March 
and  April?  "As  a  rule,"  said  John  Mill,  "panics 
do  not  destroy  capital;  they  merely  reveal  the 
extent  to  which  it  has  been  previously  destroyed 
by  its  betrayal  into  hopelessly  unproductive 
works."*  There  would  have  been  no  such 
"betrayal"  had  judicious  reflection  and  a  measure- 
ment of  facts  followed  Wall  Street's  warnings. 

A  shrewd  man,  one  of  the  old  school  of  New 
York  City  wholesale  merchants,  who  has  nothing 
whatever  to  do  with  Wall  Street  or  the  Stock 
Exchange,  yet  whose  trade  arteries  extend  to 
many  parts  of  the  country,  has  long  governed  his 
business  by  the  published  reports  of  Stock 
Exchange  transactions.  If  he  sees  there  revealed 
a  wholesome,  normal,  and  conservative  expansion 
in  all  lines  of  business  and  a  money  market  that 
betrays  no  uneasiness  as  to  the  future,  he  presses 
on  into  new  lines  of  endeavor,  confident  that  the 
immediate  future  is  serene.  If  he  finds  an  urgent 
liquidation  on  'Change,  with  the  coincident 
phenomena  of  impaired  credit  Instruments,  he 
draws  in  his  lines  and  waits.  It  makes  no  differ- 
ence to  him  who  is  rocking  the  boat,  nor  why; 
experience  has  taught  him  that  if  it  rocks,  the 
time  has  arrived  to  go  ashore.     And  this  steady 


*  "Credit  Cycles  and  the  Origin  of    Commercial  Panics,"  Manchester 
Statistical  Society,  December  ii,  1867. 


PANICS,  AND  THE  CRISIS  OF  1907        205 

old  merchant,  I  have  no  doubt,  is  but  one  of  a 
numerous  type. 

Those  who  ignore  the  economic  tides  that  ebb 
and  flow  through  the  medium  of  the  Stock 
Exchange  as  they  did  in  1907,  do  so  because  they 
do  not  understand  that  these  great  market  move- 
ments are  really  but  expressions  of  natural  laws. 
If  there  is  a  rising  tide  —  a  boom  —  it  is  attributed 
by  thoughtless  people  to  speculation  and  gambling. 
If  there  is  a  bad  break,  it  is  caused  by  panic- 
stricken  repentant  sinners,  or  by  the  activities  of 
the  bears.  The  essential  point  that  is  missed 
here  lies  in  the  fact  that,  while  bulls  and  bears 
alike  may  have  their  brief  hour,  sooner  or  later, 
regardless  of  them,  the  market  responds  to  actual 
conditions  and  discounts  the  future  of  those  con- 
ditions. 

Booms  are  not  made  on  the  Stock  Exchange; 
they  are  made  in  the  country's  fields  and  forests 
and  workshops.  Panics  are  not  created  there; 
they  have  their  origin  in  mistakes  and  excesses 
throughout  the  world,  and  in  psychologic  con- 
ditions which  stock  markets  cannot  hope  to 
control.  The  pendulum  may  swing  far,  but  it 
comes  back.  Sooner  or  later  the  movement  of 
prices  tells  the  exact  story  of  future  business,  and 
of  credit,  and  of  all  the  economic  agencies  that 
enter  into  them.     This  was  not  well  understood 


2o6  THE  STOCK  EXCHANGE  FROM  WITHIN 

in  1907,  and,  as  I  said  at  the  beginning,  I  doubt 
if  it  will  ever  be  understood  in  the  sense  that  it 
will  avoid  a  recurrence  of  panics.  All  that  we 
may  hope  for  is  that  periods  of  depression,  which 
are  inevitable,  may  not  be  attended  in  future  by 
such  a  loss  of  the  reasoning  faculties  as  that 
which  brought  about  the  affair  of  1907. 

Now  let  us  consider  another  cause  of  the  panic  — 
the  currency  system,  always  bearing  in  mind  the 
fact  that  the  first  and  greatest  cause  of  the  panic 
was  the  over-expansion  outside  of  New  York  that 
has  just  been  described.  The  causes  which  we  are 
now  to  consider  were  of  minor  importance  when 
measured  by  this  overshadowing  matter;  never- 
theless they  played  their  part  and  must  be  con- 
sidered accordingly. 

Not  all  panics,  to  be  sure,  can  be  prevented 
by  a  perfect  currency  system,  yet  this  one  could 
have  been  measurably  prevented,  and  "Wall 
Street"  and  the  Stock  Exchange  had  labored  for 
years  so  to  prevent  it.  At  the  gatherings  of  the 
Chamber  of  Commerce,  at  the  bank  meetings,  at 
all  the  meetings  of  merchants  and  manufacturers 
for  years  preceding  1907,  the  mischievous  effects 
of  our  currency  system  were  proclaimed  and  the 
ultimate  outcome  predicted.  Congress  was  peti- 
tioned again  and  again  to  remedy  those  intoler- 
able conditions,  and  to  permit  national  banks  to 


PANICS,  AND  THE  CRISIS  OF  1907        207 

expand  their  circulation  under  proper  safeguards, 
but  without  avail. 

When  the  storm  burst,  a  most  impressive  object 
lesson  in  practical  finance  resulted.  What  was 
at  worst  but  a  normal  stringency  of  the  circulating 
medium  developed,  when  added  to  abnormal 
demands  from  the  country  at  large,  into  conditions 
that  created  great  alarm.  There  was  no  way  by 
which  the  banks  of  the  country  could  use  the 
resources  which  they  actually  possessed  to  meet 
the  urgent  requirements  of  the  hour.  A  great 
nation  of  enterprising  people  found  itself  —  and 
still  finds  itself  —  compelled  to  do  a  banking 
business  differing  in  degree,  but  not  in  kind, 
from  the  old-woman-and-her-stocking  system  of 
finance.  The  way  our  bankers  got  down  on  their 
knees  to  London  and  Paris  in  that  emergency, 
frankly  admitting  their  inability,  under  our  old 
fiint-lock  laws,  to  handle  a  situation  which  foreign 
bankers  meet  without  difficulty,  is  a  subject  at 
once  painful  and  humiliating.  Literally  our 
bankers  begged  for  help  and  got  it.  Some  day 
we  shall  have  to  beg  again. 

Had  the  national  banks  of  New  York  City 
enjoyed  the  right  to  expand  their  circulation  in 
the  manner  provided  by  the  plan  of  the  American 
Bankers'  Association,  at  least  a  part  of  the 
debacle  would  have  been  avoided.     "The  banks 


2oS  THE  STOCK  EXCHANGE  FROM  WITHIN 

and  trust  companies  of  this  city  have  in  their 
vaults  the  largest  store  of  good  credit  that  can 
be  found  in  any  city  in  the  world,"  said  one  of 
America's  foremost  economists  as  the  panic  raged, 
"but  much  of  it  is  utterly  unavailable  because  of 
our  currency  system.  One  of  the  trust  companies 
that  closed  its  doors  has  in  its  possession  live  assets 
amounting  to  over  $50,000,000.  All  this  credit 
is  dead.  It  cannot  do  the  work  of  a  single  dollar 
in  the  paying-teller's  cage.  What  is  wanted  in 
a  time  like  this  is  freedom  to  convert  the  credit 
of  banks  into  a  medium  of  payment  that  will 
satisfy  the  people."* 

True  enough,  and  just  what  the  whole  financial 
community,  including  the  Stock  Exchange,  had 
been  repeating  for  years.  Currency  issues  which 
do  not  provide  for  all  situations,  including  not 
only  ordinary  demands,  but  also  such  exceptional 
cases  of  shrinkage  as  this  one  was,  can  never  be 
called  perfect,  nor  even  safe.  There  is  no  health 
in  them.f  The  most  effective  and  the  most  rapid 
means  of  regulating  and  protecting  the  general 
credit  situation  is  by  increasing  or  diminishing 
the  volume  of  outstanding  bank-note  currency  not 


*  Remarks  of  Joseph  French  Johnson,  dean  of  the  New  York  University 
School  of  Commerce,  at  the  American  Institute  of  Banking,  October  25, 
1907. 

t  Consult  Burton, /M^ra,  pp.  109-no:  Muhleman.  "Monetary  Systems 
of  the  World,"  pp.  128,  130,  135,  140. 


PANICS,  AND  THE  CRISIS  OF  1907        209 

covered  by  a  reserve  of  gold  or  other  lawful  money. 
This  method  is  employed  successfully  both  In 
France  and  in  Germany.  The  Bank  of  France  and 
the  Imperial  Bank  of  Germany  to  some  extent  reg- 
ulate credit  conditions  by  acting  as  central  banks 
of  discount;  but  their  most  effective  action  is 
by  increasing  or  diminishing  the  uncovered  amount 
of  their  outstanding  notes.  When  additional 
currency  is  needed  as  a  circulating  medium  they 
supply  this  currency  by  issuing  notes.  When 
contraction  of  currency,  or  a  check  upon  the 
further  expansion  of  bank  credits  is  desirable, 
they  accomplish  the  result  by  diminishing  the 
volume  of  their  outstanding  notes  and  by  raising 
the  discount  rate.  This  system  is  as  nearly  per- 
fect as  any  yet  devised.* 

Whether  we  shall  ever  succeed  in  adopting  it, 
or  something  like  it,  in  America,  is  the  burning 
question  in  our  banking  offices  to-day.  Until 
something  is  done,  the  layman  who  distrusts 
the  plan  of  a  central  bank  and  looks  upon  Wall 
Street  with  abhorrence,  may  find  satisfaction  in 
knowing  that  the  average  New  York  banker  is 
the  most  worried  and  harassed  man  in  American 
business  life.  With  millions  of  other  people's 
money   in   his   possession   subject  to  withdrawal 

*  "The  Banking  and  Currency  Problem  in  the  United  States,"  Victor 
Morawetz,  New  York,  North  American  Review  Publishing  Company,  190^, 
pp.  87,  rt.  seq. 


2IO  THE  STOCK  EXCHANGE  FROM  WITHIN 

by  check  at  sight,  and  with  millions  of  the  best 
security"  in  the  world  in  his  vaults  lying  absolutely 
idle  and  worthless  so  far  as  raising  currency  is 
concerned,  he  stands  between  the  devil  and  the 
deep-blue  sea.  Anything  that  frightens  his 
depositors,  or  even  remotely  suggests  panic,  gives 
him  a  cold  chill.  People  who  talk  of  manipulation 
by  New  York  bankers  as  a  cause  of  the  panic  of 
1907  or  any  other  panic  are  blind  to  the  fact  that 
any  disturbance  of  normal  conditions  is  the  one 
thing  that  bankers  would  avoid  as  they  would 
avoid  the  plague. 

There  was  a  third  cause  of  the  panic  in  the 
course  pursued  by  the  President.  In  some  quarters 
it  is  still  termed  "the  Roosevelt  panic,"  and  there 
exists  a  belief  that  the  President  by  his  actions 
and  speeches  played  a  large  part  in  bringing  about 
the.  crisis.  Personally,  I  feel  that  this  has  been 
exaggerated.  There  had  been,  unquestionably, 
wrongdoing  by  certain  corporation  managers. 
The  President,  with  a  characteristic  vigor  not 
unknown  to  politicians,  seized  upon  it  as  a  theme 
for  his  speeches,  and  the  "evils,"  the  "male- 
factors," the  "corruption"  and  "dishonesty" 
with  which  he  bruised  the  air,  raised  a  suspicion 
in  many  quarters  as  to  the  status  and  security 
of  the  whole  financial  situation  and  undoubtedly 
contributed  to  the  frightened  liquidation  of  the 


PANICS,  AND  THE  CRISIS  OF  1907        211 

day.  The  impression  these  utterances  produced 
abroad,  where  American  securities  were  popular, 
was  painful,  and  led  one  returning  tourist  to 
remark  that  Europe  was  acquiring  the  idea  that 
we  were  "  a  nation  of  swindlers. " 

All  panics  are  largely  psychological,  and 
this  was  no  exception.  The  President's  public 
speeches  came  at  a  time  when  emotion,  apprehen- 
sion, and  alarm  filled  men's  minds;  and  at  a  time 
when  those  irrational  moods  were  most  likely  to 
exaggerate  the  difficulties  that  existed,  and  to 
conjure  up  difficulties  that  did  not  exist.  Panics 
seem  to  come  from  lack  of  money,  the  real  difficulty 
is  lack  of  confidence,  and  it  was  to  this  that  the 
President's  course  directly  contributed. 

I  am  of  the  opinion  that,  judged  by  his  public 
utterances,  especially  his  October  speech  at 
Nashville,  Tenn.,  the  President  had  not  the 
remotest  idea  that  such  an  awful  shock  as  the 
panic  of  1907  was  imminent.  He  was  not  a 
student  of  economic  conditions;  he  had  no  famili- 
arity with  crisis-producing  phenomena;  he  had 
never  seen  a  panic  at  close  quarters.  His  speeches 
did  not  cause  the  panic,  for  that  disturbance  was 
foreordained;  they  served,  however,  to  hasten  it, 
to  intensify  it,  and  to  keep  it  alive.  Perhaps 
I  may  add  that  the  sparks  beaten  by  him  from 
the    anvil    of    political    expediency  at   that    un- 


212  THE  STOCK  EXCHANGE  FROM  WITHIN 

fortunate  moment  threw  more  light  upon  the 
President  himself  than  upon  the  evils  he  con- 
demned. Perhaps,  too,  that  was  what  the  Presi- 
dent most  desired.  In  any  case,  the  fact  remains 
that  just  as  there  is  too  much  confidence  in  times 
of  excessive  expansion,  so  there  is  too  little  in 
times  of  unreasoning  depression;  and  that  the 
President's  attitude  aggravated  the  latter  situa- 
tions is  undeniable. 

But  by  what  stretch  of  the  Imagination  can  the 
Stock  Exchange  be  credited  with  playing  any  part 
In  this  third  cause  of  the  panic?  If  temporary 
depression  results  from  exposure  of  wrongdoing 
among  railroad,  industrial,  or  financial  institutions, 
nowhere  in  the  land  is  execration  poured  forth 
upon  the  evil-doers  more  vigorously  than  within 
its  four  walls.  Far  from  complaining,  the  Stock 
Exchange  and  the  whole  investment  community 
welcome  such  exposures,  despite  their  effect  on 
the  market,  for  the  precise  reason  that  their  own 
protection  and  benefit,  if  nothing  else,  is  promoted 
by  it. 

There  was  yet  another  reason  for  the  panic, 
closely  related  to  the  attitude  of  the  President. 
I  refer  to  the  predicament  of  the  railways  of  the 
country  as  1906  passed  into  1907.  Staggering 
under  a  load  of  traffic  which  sorely  taxed  their 
equipment,    the    managers    of    these    properties 


PANICS,  AND  THE  CRISIS  OF  1907        213 

cried  aloud  to  the  Investing  public  for  funds. 
But  capital  was  not  to  be  had.  Tied  up  in  real- 
estate  speculation  and  in  quarters  whence  it  could 
not  be  easily  recovered,  the  normal  supply  of 
capital  was  immobile  and  inert.  What  was 
worse,  encouraged  by  the  attitude  of  the  President, 
an  epidemic  of  radical  anti-railroad  legislation 
became  manifest  in  the  several  States,  new  and 
onerous  burdens  of  taxation  were  imposed,  and  a 
wave  of  distrust  and  suspicion  regarding  railway 
investments  was  created.  Simultaneously  the 
cost  of  wages  and  materials  advanced  —  both 
characteristic  phenomena  indicating  trouble  — • 
and,  as  a  consequence  of  all  this  blockade,  the 
ratio  of  net  to  gross  in  the  matter  of  increased 
earnings  fell  from  the  normal  proportion  of  about 
40  per  cent,  in  the  first  nine  months  of  1906,  to 
less  than  10  per  cent,  in  the  same  months  of  1907. 

Railroads  are  public  utilities  that  must  continue 
to  handle  business  oiTered  them  no  matter  what 
happens,  and  so,  to  meet  all  these  abnormal 
demands,  but  one  course  was  left  open  to  them, 
and  that  was  to  raise  funds  by  issues  of  new  stock. 
This,  of  course,  amounted  practically  to  an 
assessment  of  stockholders;  as  an  expedient  it 
failed  because  "Wall  Street"  had  already  recog- 
nized the  symptoms  of  disease.  It  was  too  late. 
Money  and  credit  attract  money  and  credit,  and 


214  THE  STOCK  EXCHANGE  FROM  WITHIN 

confidence  attracts  both.  There  was  a  shocking 
absence  of  confidence  in  the  emergenc)^  of  1907, 
and  the  railroads  suffered  enormously  by  it. 

With  this  matter  certainly  Wall  Street  had 
nothing  to  do;  it  could  not  in  fact  do  more  than 
it  had  just  done  in  pointing  out  to  the  country  at 
large,  through  a  drastic  process  of  liquidation, 
the  obvious  withdrawal  of  far-sighted  investors 
from  a  situation  that  had  become  tense.  Nor  can 
the  railroads  be  censured,  because  the  great 
volume  of  business  that  confronted  them  was  not 
created  by  them,  and  yet  had  to  be  transported 
by  them.  The  fault  lay,  of  course,  in  the  wholesale 
and  reckless  expansion  of  all  lines  of  industry,  and 
in  the  immensely  increased  extravagance  of  public 
and  private  life. 

I  venture  the  prediction  that  when  these  con- 
ditions again  prevail,  as  they  must  in  a  great  and 
vigorous  country  like  ours,  the  Stock  Exchange 
will  still  be  found  sounding  its  warnings,  but  it 
will  not  do  to  hope  that  those  who  learned  the 
bitter  lesson  of  1907  will  profit  by  that  experience, 
because  the  condition  of  mental  disturbance 
which  is  a  part  of  every  panic  cannot  be  regulated 
by  the  will,  nor  kept  within  bounds  by  the  statute 
law.  The  one  lesson  we  have  learned  from  the 
predicament  of  the  railroads  in  1907  is  that  there 
is  a  tendency  toward  disturbance  in  large  acces- 


PANICS,  AND  THE  CRISIS  OF  1907        215 

sions  either  of  business  or  of  capital.  "At 
intervals,"  says  Walter  Bagehot,  "the  blind 
capital  of  a  country  is  particularly  large  and 
craving;  it  seeks  for  some  one  to  devour  it,  and 
there  is  'plethora';  it  finds  some  one,  and  there  is 
*  speculation' ;  it  is  devoured,  and  there  is  '  panic'  "* 

Summarized  briefly,  I  have  attempted  to  show- 
in  the  foregoing  pages  that  the  Stock  Exchange 
for  many  months  prior  to  the  panic  had  been 
steadily  liquidating  and  contracting,  and  had 
served  notice  on  the  country  at  large  that  the 
time  had  come  to  put  a  stop  to  the  prevalent 
over-expansion.  It  has  been  demonstrated  that 
instead  of  heeding  these  warnings  the  general 
business  of  the  country,  as  evidenced  by  the 
increases  in  loans  and  commercial  discounts  and 
by  an  over-speculation  in  real  estate  and  in  public 
and  private  extravagances,  continued  to  expand 
up  to  the  very  eve  of  the  panic,  and  was  stopped 
then  and  there  only  by  sheer  lack  of  capital. 
Nothing  can  be  of  greater  importance  in  any 
consideration  of  the  1907  crisis  than  that  its 
overshadowing  cause  was  the  attempt  to  do  too 
much  business  on  too  little  capital,  and  compared 
with  this  all  other  aspects  of  that  situation  are 
of  minor  importance. 

I    have    shown    that    an    antiquated    currency 

•"Collected  Works,"  Vol  II,  p.  2. 


2i6  THE  STOCK  EXCHANGE  FROM  WITHIN 

system  played  a  conspicuous  part  in  the  crisis, 
through  contributory  negligence  on  the  part  of 
our  law-makers.  The  part  played  by  the  Presi- 
dent has  been  cited  as  a  third,  though  somewhat 
negligible,  factor  in  sowing  the  seed  of  distrust, 
and  also  the  trying  position  in  which  the  great 
common  carriers  of  the  country  found  themselves 
after  the  seeds  of  distrust  had  been  sown.  These 
were  the  four  causes  of  the  panic  of  1907.* 

How  well  the  Stock  Exchange  did  its  work  in 
that  great  emergency  is  a  matter  of  record.  It  did 
not  close  its  doors;  there  were  no  failures;  no 
relaxation  of  the  protection  afforded  the  public; 
no  departure  from  the  high  standard  of  morality 
which  is  ever  its  goal.  In  one  week,  ending 
October  25th,  5,166,560  shares  passed  through  its 


*  Senator  Burton  "Crises  and  Depressions,"  pp.  51,  52,  enumerates  the 
important  indicia  of  crisis-producing  conditions  as  follows: 

(a)     An  increase  in  prices  of  commodities  and  later  of  real  estate. 

{b)  Increased  activity  of  established  enterprises  and  the  formation  of 
many  new  ones,  especially  those  which  provide  for  increased  pro- 
duction and  improved  methods,  all  requiring  the  change  of  cir- 
culating to  fixed  capital. 

(c)  An  active  demand  for  loans  at  higher  rates  of  interest. 

(d)  The  general    employment  of  labor  at  increasing  or  well-sustained 

wages. 

(e)  Increasing  extravagance  in  private  and  public  expenditure. 

(0     The  development  of  a  mania  for  speculation,  attended  by  dishonest 

methods  in  business  and  the  gullibility  of  investors. 
(g)     A  great  expansion  of  discounts  and  loans  and  a  resulting  rise  in 
the  rate  of  interest;  also  a  material  increase  in  wages,  attended  by 
frequent  strikes  and  by  difficulty  in  obtaining  a  sufficient  number 
of  laborers  to  meet  the  demand. 
Not  one  of  these  indications  of  trouble  was  lacking  in  the  period  preceding 
the  panic  of  1907. 


PANICS,  AND  THE  CRISIS  OF  1907        217 

hands,  representing,  with  the  transactions  in 
bonds,  a  par  valuation  exceeding  ^483,000,000. 

Now,  in  the  very  nature  of  things,  a  financial 
panic  is  the  inability  of  many  debtors  to  meet 
their  obligations,  plus  the  fear  that  many  others 
may  be  In  the  same  plight.  At  such  a  time  men 
hasten  to  sell  for  cash  that  for  which  there  is  the 
readiest  market.  Thus  they  sell  securities  because 
securities  are  Immediately  convertible;  thus  they 
turn  to  the  Stock  Exchange,  because  that  is  what 
Stock  Exchanges  are  for.  Hence  it  follows  that 
in  a  crisis  such  as  that  of  1907  the  ruinous  decline 
manifests  Itself  more  sharply,  and  Is  felt  more 
keenly,  on  the  Stock  Exchange  than  on  the  Cotton 
Exchange  or  the  Produce  Exchange.  Men  turn 
to  It  for  first  aid  to  the  Injured,  and  the  greater 
the  casualty  list,  the  more  marked  is  the  dis- 
turbance of  values.  That  this  Is  not  well  under- 
stood by  the  public  often  unfortunately  leads  to 
suggestions  of  improper  methods  where  none  exist. 

Finally,  where  do  we  stand  .^  Orthodox  econ- 
omists like  Wells  talk  of  over-production  as  a 
cause  of  panics;  currency  experts  bewail  a  lack 
of  circulating  media;  theorists  of  the  school  of 
Jevons  are  driven  to  seek  In  sun-spots  the  potent 
force  of  all  our  harvests;  Levi  and  Mill  dwell 
upon  the  periodicity  of  panics  and  would  fix  their 
appearance  by  schedules  of  time;  politicians  and 


2i8  THE  STOCK  EXCHANGE  FROM  WITHIN 

thinkers-In-embryo  point  the  finger  at  Wall  Street, 
and  yet,  with  all  that  has  been  written,  thirteen 
great  crises  at  home  and  abroad  within  the  last 
century  show  that  we  have  not  begun  to  get  at 
these  disturbances.  Drou^t  has  been  a  cause  of 
mischief,  yet  we  have  learned  to  irrigate  and  to 
conserve;  epidemics  have  smitten  us,  yet  we  have 
mastered  sanitation;  floods  have  ruined  whole 
territories,  yet  we  have  built  dikes  and  levees. 
But  every  now  and  then,  when  business  seems 
to  be  at  its  best,  when  merchants  are  dividing 
large  profits,  and  when  labor  is  best  rewarded, 
a  panic  occurs  and  the  whole  structure  collapses. 
To  say  that  Wall  Street  or  Lombard  Street  or 
any  group  of  men  anywhere  can  bring  such  condi- 
tions to  pass  is  to  deny  all  the  facts  of  experience. 
Depressions  may  come  from  any  of  a  hundred 
causes,  but  panics  originate  in  the  mind;  they  are 
manias.  Walter  Bagehot  gave  up  trying  to  pre- 
scribe for  them  because  he  realized  that  sudden 
frenzy  is  not  an  ailment  to  be  foreseen  and  pre- 
vented. "But  one  thing  is  certain,"  he  said, 
"that  at  particular  times  a  great  many  stupid 
people  have  a  great  deal  of  stupid  money;" 
to  which  he  adds,  "our  scheme  is  not  to  allow 
any  man  to  have  a  hundred  pounds  who  cannot 
prove  to  the  Lord  Chancellor  that  he  knows  what 
to  do  with  a  hundred  Dounds."     When  thousands 


PANICS,  AND  THE  CRISIS  OF  1907        219 

of  people  ignore  all  the  warnings  of  experience,  as 
they  always  will  do;  when  with  a  blind  misdirec- 
tion of  energy  they  sink  borrowed  capital  in 
quagmires  at  fancy  prices,  as  they  always  have 
done;  and  when,  shorn  of  their  all,  they  are 
simultaneously  seized  with  a  mania  to  denounce 
others  for  the  consequences  of  their  own  folly,  as 
they  always  must  do,  one  cannot  avoid  the  thought 
that  perhaps  Bagehot's  humorous  solution  is  the 
best  that  has  been  devised.* 


*The  student  who  wishes  to  inquire  at  length  into  the  subject  of  panics^ 
crises,  and  depressions  will  find  useful  aids  in  the  authorities  already  quoted, 
and  in  the  following  additional  works: 

A.  Allard,  La  Crise  Agricole  et  manufacturiere  devant  la  Conference 
monetaire  de  Bruxelles;  Brussels,  1893. 

A.  Baring  (Lord  Ashburton),  The  Financial  and  Commercial  Crises 
Considered;  London,  Murray,  1847. 

C.  W.  Smith,  Commercial  gambling,  the  principal  cause  of  depression 
in  agriculture  and  trade;    London,  Low,  1893. 

C.  Wooley,  Phases  of  Panics;  a  brief  historical  review;  London, 
Good,  1897. 

C.  Juglar,  A  brief  history  of  panics  and  their  periodical  occurrences 
in  the  United  States;  New  York,  Putnam,  1893. 

E.  Goodby  &  W.  Watt,  The  present  depression  in  trade,  its  causes 
and  remedies. 

Henry  Wood,  The  Political  Economy  of  Natural  Law,  Boston,  Lee  & 
Sheppard,  1894. 

H.  M.  Hyndman,  Commercial  Crises  of  the  Nineteenth  Century;  London, 
Swan  Sonnenschein  &  Co.,  1892. 

H.  Denis,  La  Depression  Economique  et  Sociale  et  I'histoire  des  prix; 
Brussels,  1895. 

J.  Eadie,  Panics  in  the  money  market,  etc.;  New  York,  1893. 

Michael  G.  Mulhall,  History  of  Prices  Since  1850;  London,  Longmans, 
Green  &  Co.,  1885. 

R.  Browning,  The  Currency  considered  with  a  view  to  the  effectual 
prevention  of  panics;  London,  1869. 

The  Pears  prize  essays.     London,  Chatto,  1885. 

W.  W.  Lloyd,   Panics  and  their  panaceas;  London,  Harrison,  1869. 

W.  H.  Crocker,  The  cause  of  hard  times;  Boston,  Little,  Brown  &  Co., 


CHAPTER  VII 


A    BRIEF    HISTORY    OF    LEGISLATIVE    ATTEMPTS    TO 
RESTRAIN    OR    SUPPRESS    SPECULATION 


CHAPTER  VII 

A   BRIEF   HISTORY    OF    LEGISLATIVE   ATTEMPTS   TO 
RESTRAIN    OR    SUPPRESS    SPECULATION 

In  THE  Middle  Ages  the  notion  prevailed  that 
there  was  a  just  and  equitable  price  for  every- 
thing, and  that  any  person  who  tried  to  obtain 
more  than  this  price  was  a  sinner.  Trade  for 
gain  was  anathema;  the  man  who  bought  the 
principal  commodities  of  that  time,  such  as  corn 
or  herrings,  with  a  view  to  selling  them  at  a  profit, 
was  guilty  of  "craft  and  sublety"  —  as  the  old 
English  statutes  read  —  that  infallibly  cost  him 
his  goods  and  brought  him  to  the  pillory.  Thus 
in  the  year  13 ii  one  Thomas  Lespicer  of  Ports- 
mouth was  caught  red-handed  in  London  with  six 
pots  of  Nantes  lampreys  stored  in  a  fishmonger's 
cellar  in  the  hope  of  a  rising  market.  The  law 
required  that  when  he  arrived  in  London  from 
Portsmouth  with  his  lampreys  he  should  proceed  to 
the  open  market  under  the  wall  of  St.  Margaret's 
Church  in  Bridge  Street,  and  stand  there  four  days 
selling  at  current  prices  to  any  one  who  cared  to 
buy.     His  failure  to  do  so,  and  his  wickedness  in 

223 


224  THE  STOCK  EXCHANGE  FROM  WITHIN 

attempting  to  "bull"  the  lamprey  market  by 
hiding  them  in  the  fishmonger's  cellar,  resulted 
in  the  arrest  of  himself  and  the  fishmonger,  and 
their  trial  and  punishment  at  the  hands  of  the 
Mayor  and  Alderman. 

Professor  W.  T.  Ashley,  who  cites  this  incident 
in  his  "Introduction  to  English  Economic  History 
and  Theory"  (London  1892),  also  gives  another 
instance  in  which  our  modern  theories  of  natural 
rights  and  freedom  of  contract  seem  to  be  in 
hopeless  conflict.  John-at-Wood,  a  baker,  was 
arrested  in  1364  charged  with  the  profane  practice 
of  "bulling"  wheat.  "Whereas  one  Robert  de 
Cawode,"  the  indictment  reads,  "had  two  quarters 
of  wheat  for  sale  in  common  market  on  the  pave- 
ment within  Newgate;  he,  the  said  John,  cunningly 
and  by  secret  words  whispering  in  his  ear,  fraud- 
ulently withdrew  Cawode  out  of  the  common  mar- 
ket, and  they  went  together  into  the  Church  of 
the  Friars  Minor,  and  there  John  bought  the  two 
quarters  at  I5|d  per  bushel,  being  2^d  over  the 
common  selling  price  at  that  time  in  the  market, 
to  the  great  loss  and  deceit  of  the  common  people, 
and  to  the  increase  of  the  dearness  of  wheat." 
At-Wood  denied  this  heinous  offence  and  "put 
himself  on  the  country,"  whereupon  a  jury  was 
empanelled,  which  gave  a  verdict  that  At-Wood 
had  not  only  thus  bought  the  grain,  but  that  he 


LEGISLATION  225 

had  afterward  returned  to  the  market  and  boasted 
of  his  crime,  and  "this  he  said  and  did  to  increase 
the  dearness  of  wheat. "  Accordingly  he  was 
sentenced  to  be  put  in  the  pillory  for  three  hours, 
and  one  of  the  sheriffs  was  directed  to  see  the 
sentence  executed  and  proclamation  made  of  the 
cause  of  the  punishment. 

So  far  as  I  am  aware  the  Statutes  of  Henry  III 
and  Edward  I,  under  which  these  culprits  were 
punished,  constitute  the  earliest  official  attempts 
to  repress  speculation  by  law.  After  the  Revolu- 
tion, the  Bank  of  England  having  been  organized 
and  bank  shares  created,  a  speculative  outburst 
occurred  that  led  to  the  enactment  of  fresh  legis- 
lation entitled  "An  act  to  restrain  the  numbers  and 
ill  practices  of  brokers  and  stock-jobbers,"*  but 
this  law  lapsed  or  was  repealed  ten  years  later. 
In  1707  a  law  was  passed  licensing  brokers  and 
making  it  unlawful  for  unlicensed  brokers  to  do 
business, f  and  in  1708  City  rules  were  established 
for  brokers,  obliging  them  to  give  bonds  for  the 
proper  performance  of  their  duties.  In  171 1, 
1713,  and  1719,  laws  were  enacted  similar  to  the 
Act  of  1707. 

Then  came  the  speculative  schemes  of  1720, 
of  which  the   most  famous  or  infamous  was  the 


*  (8  and  9  Will,  III,  Ch.  32.) 
t  (6  Anne,  Ch.  16.) 


226  THE  STOCK  EXCHANGE  FROM  WITHIN 

South  Sea  Company,  designed  to  make  fortunes 
for  its  shareholders  in  the  slave-trade  and  in 
whale  fishing.  It  was  followed  by  many  other 
projects  almost  fantastic  in  their  wildness  to 
each  of  which  the  public  subscribed  liberally. 
Where  all  the  money  came  from  that  kept  this 
disastrous  speculative  mania  alive  is  something 
one  would  like  to  know.  There  seems  to  have 
been  no  limit  to  it.  South  Sea  shares  stood  at 
1 20  in  April  of  1720;  in  July  they  had  reached 
1020,  and,  after  that,  the  collapse.  The  company 
became  a  "bubble,"  and  a  burst  one  at  that  — 
and  a  great  popular  outcry  followed.  It  resulted, 
in  1734,  in  the  passage  of  Sir  John  Barnard's 
"Act  to  Prevent  the  Infamous  Practice  of  Stock- 
Jobbing,"  the  preamble  reciting:     • 

"Whereas,  great  inconveniences  have  arisen,  and  do 
daily  arise,  by  the  wicked,  pernicious,  and  destructive  prac- 
tice of  stock-jobbing,  whereby  many  of  His  Majesty's 
good  subjects  have  been  and  are  diverted  from  pursuing 
and  exercising  their  lawful  trades  and  vocations  to  the  utter 
ruin  of  themselves  and  their  families,  to  the  great  discourage- 
ment of  industry,  and  to  the  manifest  detriment  of  trade  and 
commerce." 

This  act  forbade  bargains  for  puts  and  call§,  and 
also  "the  evil  practice  of  compounding  or  making 
up  differences";  but  its  principal  provision  was  the 
prohibition  of  short  selling  under  penalty  of  £ioc 


LEGISLATION  227 

for  each  transaction.  There  was,  of  course,  an 
appeal  to  the  courts,  which  held  that  the  statute 
did  not  apply  to  foreign  stocks  nor  to  shares  in 
companies,  but  only  to  English  public  stocks, 
a  decision  that  effectually  put  an  end  to  the 
usefulness  of  the  law.  It  remained  on  the  statute 
books,  however,  and  it  was  occasionally  resorted 
to  by  persons  who  sought  to  evade  the  fulfillment 
of  their  speculative  contracts  —  a  class  of  persons 
known  to-day  as  "welchers." 

Finally,  in  i860,  the  law  was  repealed  altogether, 
the  repeal  act  reciting  that  Sir  John  Barnard's 
Act  "imposed  unnecessary  restrictions  on  the 
making  of  contracts  for  sale,  and  transfer  of  public 
stocks  and  securities."  Thus  the  first  serious 
attempt  to  regulate  speculation  in  securities  by 
law,  and  specifically  to  prohibit  short  selling, 
came  to  be  recognized  as  a  failure  by  the  frank 
admission  of  government.  In  1867  the  so-called 
Leeman  Act  became  law,  prohibiting  all  sales  of 
bank  stock  unless  the  numbers  of  the  certifi- 
cates sold  were  specified  —  an  attempt  to  prevent 
short  selling  of  bank  stock.  Even  this  law  was 
subsequently  repealed,  and  England,  to-day,  has 
no  law  on  the  statute  books  restricting  speculation. 

As  the  London  Stock  Exchange  grew  in  influence 
and  importance,  reflecting  England's  develop- 
ment as  the  world's  banker,  popular  attack  and 


228  THE  STOCK  EXCHANGE  FROM  WITHIN 

criticism  continued  to  assail  it.  It  may  be  frankly 
admitted  that  the  legitimate  functions  of  the 
institution  had  been  abused  by  foolish  or  unscrupu- 
lous persons,  just  as  every  important  branch  of 
business  and  politics  has  been  misused,  the  world 
over,  since  civilization  began.  The  question 
therefore  arose  whether  these  occasional  sharp 
practices  proved  the  Exchange  to  be  an  excres- 
cence on  the  body  politic,  or  whether,  on  the  other 
hand,  its  importance  in  the  mechanism  of  modern 
business  merely  required  improvements  and  re- 
forms. In  this  situation,  which  occurred  in  1877, 
and  which  caused  considerable  agitation  on  the 
part  of  both  parties  to  the  controversy,  a  royal 
commission  was  appointed  "to  inquire  into  the 
origin,  objects,  present  constitution,  customs,  and 
usages  of  the  London  Stock  Exchange."  The 
Exchange  and  its  critics  thus  reached  the  parting 
of  the  ways.  A  year  was  spent  by  the  commission 
in  examining  witnesses  and  conducting  investi- 
gations along  special  lines,  and  in  1878  its  report, 
with  the  evidence,  was  published  in  a  Parlia- 
mentary Blue  Book. 

The  report  absolutely  upheld  the  purposes  and 
functions  of  the  Stock  Exchange  and  the  legiti- 
macy of  speculation  in  securities,  and  it  went 
further  in  pointing  out  the  danger  of  attempting 
to   force    any   form   of   external   control   on   the 


LEGISLATION  229 

Institution.  The  evils  of  that  form  of  Stock 
Exchange  speculation  which  closely  approaches 
mere  gambling  were  plainly  stated,  and  the  report 
suggested  that  the  Exchange  authorities  restrain 
such  practice  in  so  far  as  was  possible. 

As  the  conclusions  of  the  royal  commission  are 
of  very  great  importance,  marking  as  they  do 
the  first  serious  official  study  in  modern  times  of 
the  Stock  Exchange  theory,  I  quote  from  the 
Blue  Book  in  the  hope  that  Stock  Exchange 
critics  of  to-day  may  understand  how  these 
conclusions  were  reached.  "In  the  main,"  reads 
the  report,  "the  existence  of  the  Stock  Exchange 
and  the  coercive  action  of  the  rules  which  it 
enforces  upon  the  transaction  of  business  and  upon 
the  conduct  of  its  members  has  been  salutary  to 
the  interests  of  the  public.  We  wish  to  express 
our  conviction  that  any  external  control  which 
might  be  introduced  by  such  a  change  should  be 
exercised  with  a  sparing  hand.  The  existing 
body  of  rules  and  regulations  have  been  formed 
with  much  care,  and  are  the  result  of  the  long 
experience  and  vigilant  attention  of  a  body  of 
persons  intimately  acquainted  with  the  needs 
and  exigencies  of  the  community  for  whom  they 
have  legislated.  Any  attempt  to  reduce  this  rule 
to  the  limits  of  the  ordinary  laws  of  the  land,  or  to 
abolish  all  checks  and  safeguards  not  to  be  found 


230  THE  STOCK  EXCHANGE  FROM  WITHIN 

in  that  law,  would,  in  our  opinion,  be  detrimental 
to  the  honest  and  efficient  control  of  business." 
In  1909  similar  criticism  in  New  York  having 
led  to  the  appointment  of  the  Hughes  Commission 
to  inquire  "what  changes,  if  any,  are  advisable 
in  the  laws  of  the  State  bearing  upon  speculation 
in  securities  and  commodities,  or  relating  to  the 
protection  of  investors,  or  with  regard  to  the 
instrumentalities  and  organizations  used  in  deal- 
ings in  securities  and  commodities,  which  are  the 
subject  of  speculation,"  the  commission  reported 
to  the  Governor,  after  six  months  of  laborious 
investigation,  in  these  words : 

"Speculation  in  some  form  is  a  necessary  incident  of 
productive  operation.  When  carried  on  in  connection  with 
either  commodities  or  securities  it  tends  to  steady  their 
prices.  Where  speculation  is  free,  fluctuations  in  prices, 
otherwise  violent  and  disastrous,  ordinarily  become  gradual 
and  comparatively  harmless.  For  the  merchant  or  manu- 
facturer speculation  performs  a  service  which  has  the  effect 
of  insurance.  The  most  fruitful  policy  will  be  found  in 
measures  which  will  lessen  speculation  by  persons  not  quali- 
fied to  engage  in  it.  In  carrying  out  such  a  policy  exchanges 
can  accomplish  more  than  legislation.  We  are  unable  to 
see  how  a  State  could  distinguish  by  law  between  proper 
and  improper  transactions,  since  the  forms  and  the  mechan- 
isms used  are  identical.  Rigid  statutes  directed  against  the 
latter  would  seriously  interfere  with  the  former.  Purchasing 
securities  on  margin  is  as  legitimate  a  transaction  as  the  pur- 
chase of  any  property  in  which  part  payment  is  deferred. 
We,  therefore,  see  no  reason  whatsoever  for  recommending 


LEGISLATION  231 

the  radical  change  suggested  that  margin   trading  be  pro- 
hibited." 

Here  are  two  reports  at  an  interval  of  thirty- 
one  years,  made  by  independent  investigators  of 
high  character,  concerning  the  two  foremost 
Stock  Exchanges  in  the  world.  Both  of  these 
reports  recommend  changes  and  improve- 
ments, and  each  is  firmly  of  opinion  that  the 
changes  recommended  are  such  as  can  be  car- 
ried out  by  the  Stock  Exchanges  themselves 
without  the  assistance  or  interference  of  the  legis- 
lature. 

As  the  London  Stock  Exchange  is  a  voluntary 
association  similar  to  that  in  New  York,  it  was 
inevitable  that  the  question  of  incorporation 
should  have  been  brought  before  the  royal 
commission  of  1877,  and  that  the  question  as  to 
whether  the  public  interest  would  be  promoted  by 
such  incorporation  should  be  given  careful  atten- 
tion. As  a  result  of  these  deliberations,  a  majority 
of  the  commission  recommended  that  the  London 
Stock  Exchange  should  voluntarily  apply  for 
a  royal  charter  or  act  of  incorporation,  but  the 
reasons  upon  which  this  recommendation  were 
based  had  to  do  with  the  temporary  or  shifting 
character  of  the  membership,  which  gave  very 
little  assurance  to  the  public  of  the  permanence 
and  stability  of  the  rules,  since  members  of  the 


232  THE  STOCK  EXCHANGE  FROM  WITHIN 

London  Stock  Exchange  are  only  elected  for  one 
year.  It  need  scarcely  be  added  that  such  an 
argument  would  not  apply  to  the  New  York 
Stock  Exchange. 

Now  it  so  happened  that,  despite  this  opinion 
by  the  royal  commission,  the  London  Exchange 
was  not  compelled  to  incorporate,  and  remains 
to-day  a  purely  voluntary  association  or  club. 
The  reason  for  this  lies,  in  large  measure,  in  the 
very  intelligent  minority  opinions  filed  with  the 
Board's  report  by  those  of  its  members  who 
dissented  from  the  recommendation.  As  this  is 
a  matter  of  interest  to  members  and  friends  of 
the  New  York  Stock  Exchange,  I  give  herewith 
the  substance  of  these  dissenting  opinions,  calling 
the  reader's  attention  to  the  fact  that  the  Hughes 
Commission  of  1909  rejected  similar  proposals 
regarding  the  New  York  Stock  Exchange.*  The 
Hon.  Edward  Stanhope,  Al.  P.,  said,  regarding  the 
proposed  application  for  a  charter: 

"Supposing  such  an  application  to  be  made,  and  Parlia- 
ment to  be  prepared  to  incorporate  the  Stock  Exchange  on 
the  terms  which  are  embodied  in  the  report,  the  consequence 
would  be  that  rules  so  established  would  be  stereotyped, 
and  could  only  be  altered,  even  in  the  minutest  details,  with 
the  approval  of  a  department  of  the  State.  In  my  opinion 
this  requirement  would  be  either  mischievous  or  nugatory. 
To  attempt  to  regulate  the  manner  in  which  business   is 

*  See  appendix. 


LEGISLATION  233 

conducted  in  the  great  money  market  of  England  is  going 
far  beyond  the  province  of  the  State,  nor  is  any  government 
department  in  any  way  qualified  to  undertake  it.  The 
report,  indeed,  recommends  that  external  control  should  be 
exercised  with  a  sparing  hand.  But  experience  seems  to 
show  that  the  first  commercial  crisis,  or  the  discovery  of  any 
gigantic  fraud,  would  cause  a  pressure  for  further  restrictions 
which  the  department  entrusted  with  these  duties  could 
not  possibly  withstand.  If  incorporation  is  to  be  anything 
more  than  a  theory,  it  seems  to  me  that  it  must  either  be 
imposed  compulsory  upon  the  Stock  Exchange,  or  it  must 
be  offered  to  them  on  terms  which  will  make  it  worth  their 
while  to  accept  it.  The  first  alternative  I  reject,  for  the 
reason  given  by  the  select  committee  on  foreign  loans, 
that  it  would  destroy  that  freedom  which  is  the  life  and 
soul  of  the  institution.  If,  however,  any  voluntary  scheme 
commends  itself  to  the  opinion  of  the  Stock  Exchange,  its 
primary  condition  should  be  to  reserve  to  that  body  absolute 
liberty  in  the  transaction  of  their  ordinary  business  (as 
to  which  we  are  all  of  opinion  that,  speaking  generally,  no 
just  fault  can  reasonably  be  found),  and  also  the  power 
of  adapting  their  rules,  with  the  utmost  ease  and  freedom, 
to  the  varying  wants  of  the  time." 

Mr.  S.  R.  Scott  of  the  dissenting  minority  was 
even  more  emphatic  in  his  objections  to  incorpo- 
ration.    He  said: 

"In  fixing  my  name  to  this  report,  I  desire  to  make  the 
reservations  following;  i.  With  regard  to  incorporation,  I 
object  to  recommend  it  for  the  following  reasons:  Hitherto, 
the  Stock  Exchange  has  been  carried  on  with  great  success 
as  a  voluntary  association,  and  has  had  a  vigorous  growth. 
It  has  not  enjoyed  a  single  legal  privilege,  yet  it  has  thriven 
and  the  public  have  neglected  more  than  one  effort  to  estab- 
lish an  open  market  to  resort  to  it  for  business,  and  to  give 


234  THE  STOCK  EXCHANGE  FROM  WITHIN 

it  exclusive  confidence.  This  royal  commission  has  been 
sitting  more  than  twelve  months,  yet  no  important  or  reliable 
evidence  has  been  volunteered  of  a  character  adverse  to 
the  general  practices  or  conduct  of  business  on  the  Stock 
Exchange.  If  proof  be  required  that  the  internal  legislation 
and  administration  of  the  Stock  Exchange  enforce  a  higher 
standard  of  morality  than  the  law  can  reach  or  enacts  for 
the  regulation  of  other  trades,  such  proof  is  to  be  found  in  the 
fact  that  recently  the  committee  of  the  Stock  Exchange 
were  assailed  at  law  by  a  member  whom  they  expelled  on  a 
charge  of  dishonorable  conduct,  the  lawsuit  being  based  on 
the  ground  that  the  action  of  the  committee  was  not  justified 
in  law.  The  trial  lasted  seven  days  and  proved  abortive, 
the  distinction  between  the  standard  enforced  by  the  com- 
mittee and  the  statutory  provisions  of  the  law  not  being 
appreciated  by  the  special  jury  promiscuously  selected 
from  various  trades,  although  quite  intelligible  to  the  judge. 
In  maintaining  this  high  standard  the  committee  are  com- 
pelled to  go  beyond  the  common  law,  binding  their  members 
to  the  observance  of  their  rules  and  practices,  even  though  not 
enforceable  in  a  court  of  law.  If,  however,  they  should  sub- 
mit to  incorporation,  their  rules  would  have  to  be  assimilated 
to  the  law,  and  their  freedom  of  action  would  be  curtailed  — 
results  which  might  tend  to  cripple  them  in  sustaining  the 
standard  alluded  to,  and  operate  in  many  ways  as  a  hindrance 
to  that  rapidity  of  action  which  is  an  absolute  necessity  in 
critical  times.  Further,  incorporation  implies,  in  some  sort, 
monopoly,  and  it  remains  to  be  proved  that  the  public 
would  gain  by  any  restriction  of  the  freedom  of  trade,  even 
in  stocks  and  shares.  I  adhere  to  the  opinion  expressed  in 
1875  by  the  Committee  on  Foreign  Loans,  on  page  47  of 
their  report,  as  follows:  'That  such  a  body  (the  Stock 
Exchange)  can  be  hardly  interfered  with  by  Parliament 
without  losing  that  freedom  of  self-government  which  is  the 
only  life  and  soul  of  business.'" 


LEGISLATION  235 

As  I  have  outlined  elsewhere  in  this  volume 
the  cogent  objections  to  incorporation  of  the 
New  York  Stock  Exchange,  it  only  remains  to 
say  here  that  the  great  argument  against  such  a 
step  consists  in  the  Governing  Committee's 
absolute  power  of  summary  discipline  over  the 
-  members,  a  power  that  greatly  exceeds  the 
authority  of  the  common  law,  and  one  that  pro- 
tects the  patrons  of  the  Exchange  to  an  extent 
that  would  not  be  possible  if,  under  incorporation, 
members  could  invoke  their  constitutional  preroga- 
tives.* Said  the  governors  in  reply  to  a  question 
of  the  Hughes  Commission:  "Appeals  to  the  courts 
have  been  rare,  considering  the  number  of  cases  in 
which  such  power  of  discipline  has  been  exercised, 
but  we  may  well  cite  as  substantiating  in  an  extra- 
ordinary degree  the  fairness  and  right-mindedness 
with  which  members  have  been  held  to  their 
obligations,  the  fact  that,  although  in  a  number 
of  instances  appeals  have  been  made  to  the  courts 
for  reinstatement  by  members  who  have  been 
expelled  or  suspended  for  infraction  of  the  rules, 
or  for  conduct  which,  although  it  might  not  be 
in  violation  of  any  express  rule  or  regulation, 
or  in  violation  of  any  law  or  legal  obligation,  the 
committee  have  held  to  be  inconsistent  with  the 
maintenance  and  exercise  of  those  standards  of 

*  See  p.  140. 


236  THE  STOCK  EXCHANGE  FROM  WITHIN 

honorable  dealing  which  it  is  the  function  of  the 
Exchange  to  inculcate  and  maintain;  nevertheless, 
in  the  last  twenty-eight  years  there  has  not  been 
a  single  instance  of  the  judgment  of  the  Govern- 
ing Committee  being  reversed  by  the  courts." 

The  distinction  between  the  expulsion  of  a 
member  of  such  a  voluntary  unincorporated  asso- . 
ciation  and  the  expulsion  or  removal  of  a  mem- 
ber of  a  corporation  is  very  important.  The 
moment  the  body  receives  a  charter  a  different 
set  of  principles  comes  into  play  as  regulating  the 
relations  between  the  member  and  the  body.* 

Germany  dealt  with  a  similar  situation  m  very 
different  fashion.  In  the  autumn  of  1891  there 
were  disastrous  failures  of  certain  German  banking 
houses,  resulting  from  criminal  misuse  of  bank 
deposits  and  from  an  undue  participation  in 
speculative  transactions  by  the  general  public. 
The  outcry  that  followed  was  no  new  thing  in 
Germany,  for  as  early  as  1888  conditions  that  had 
arisen  in  the  Berlin  market  and  the  Hamburg 
coffee  market  had  led  to  petitions  to  the  Reichstag 


*  For  a  legal  opinion  concerning  the  rights  of  plaintiffs  arising  from  mem- 
berships in  a  corporaticm  as  contrasted  with  those  arising  from  memberships 
in  a  voluntarily  unincorporated  association  the  reader  is  referred  to  White 
vs.  Brownell  {2  Daly  at  p.  337),  opinion  at  Special  Term  by  Justice  Van 
Vorst;  and  the  same  case  at  General  Term,  opinion  by  Justice  Dalj'.  The 
■courts  of  New  York  State  have  on  a  number  of  occasions  expressed  their 
approval  of  the  manner  in  which  the  Stock  Exchange  has  discharged  its 
functions  under  this  form  of  organization.  The  reader's  attention  is 
tailed  to  Belton  vs.  Hatch,  109,  New  York,  597,  Court  of  Appeals. 


LEGISLATION  237 

demanding  remedies  for  speculative  evils.  The 
cumulative  effect  of  these  difficulties  was  such  that, 
as  related  by  Doctor  Loeb,  bills  directed  against 
speculation  on  the  Exchanges  were  introduced 
in  November,  1891.  "As  early  as  February  16, 
1892,"  according  to  this  authority,  "the  Chan- 
cellor of  the  Empire  appointed  a  commission 
of  inquiry  of  twenty-eight  members,  most  of 
them  lawyers,  but  with  representation  also  of 
landed  proprietors,  economists,  and  merchants. 
The  chairman  was  the  President  of  the  Director- 
ate of  the  Reichbank,  Doctor  Koch.  The  com- 
mission began  its  inquiries  in  April,  1892,  held  93 
sessions,  and  summoned  115  witnesses,  of  whom 
the  great  majority  were  persons  engaged  in  the 
transactions  which  it  was  proposed  to  regulate. 
The  commission  also  made  inquiries  as  to  the 
state  of  legislation  and  trade  usages  in  the  several 
states  of  the  Empire  and  in  foreign  countries. 

"The  commission  presented  a  majority  report 
on  November  11,  1893,  recommending  certain 
statutory  and  administrative  changes.  The  prin- 
ciples on  which  these  recommendations  rested 
was  that,  in  view  of  the  importance  of  the  interests 
which  were  represented  at  the  Exchanges,  modi- 
fications should  be  made  with  caution,  and  the 
existing  complicated  trade  usages  and  methods 
should   not  be   disregarded;  while,   on  the  other 


238  THE  STOCK  EXCHANGE  FROM  WITHIN 

hand,  there  was  no  occasion  for  regarding  with 
mistrust,  still  less  with  hostility,  interference  in 
the  free  working  of  industrial  forces.  "* 

Up  to  this  point,  it  will  be  observed,  the  German 
investigators  followed  precisely  the  same  lines 
as  the  English  Commission  of  1877  and  the 
Hughes  Commission  of  1909.  Mistakes  are  recog- 
nized, but  modifications  are  to  be  made  "with 
caution. "  But  it  so  happened  that  the  recom- 
mendations in  this  respect  were  not  followed. 
German  politics  at  that  time  were  in  a  state  of 
turmoil  in  consequence  of  the  Agrarian  agitation, 
and  in  the  various  phases  of  political  expediency 
that  attended  the  uproar,  first  the  government 
and  then  the  Reichstag  insisted  upon  more  and 
more  stringent  enactments  concerning  legislation 
against  the  Exchange,  until  finally  a  hostile  law 
was  enacted  quite  out  of  line  with  the  original 
recommendations  of  the  committee  of  inquiry. 
In  other  words,  the  politicians  ignored  the  labors 
of  the  committee  and  took  matters  into  their  own 
hands.  The  three  important  provisions  of  this 
law  were  these: 

(i)  All  exchange  dealings  for  future  delivery  in  grain  and 
flour  were  forbidden. 

(2)  All  exchange  dealings  for  "the  account"  in  the  shares 
of  mining  and  industrial  companies  forbidden. 

*  "The  German  Exchange  Act  of  1896,"  by  Dr.  Ernst  Loeb,  in  the 
Quarterly  Journal  of  Economics,  July,  1897. 


LEGISLATION  239 

(3)  An  "Exchange  Register"  was  established  in  which 
was  to  be  entered  the  name  of  every  person  who  wished 
to  engage  in  exchange  transactions  for  future  delivery. 
Contracts  made  by  two  persons  entered  in  the  register  were 
declared  binding  and  exempt  from  the  defence  of  wager. 

The  immediate  effect  of  this  law  on  the  German 
grain  market  was  disastrous.  Futures  were  not 
suppressed.  The  grain  trade  was  simply  forced 
by  the  law  to  give  up  the  modern  machinery  that 
experience  had  developed,  and  go  back  to  anti- 
quated forms  of  dealing.  "It  was  like  taking 
machinery  out  of  a  mill,"  says  Frank  Fayant, 
"and  putting  manufacture  back  to  hand  labor." 
As  to  trading  in  securities  "for  the  account," 
here,  too,  the  law  failed  utterly.  Even  the 
government  —  at  that  time  most  unfriendly  to 
the  Exchanges  —  admitted  in  its  official  reports 
that  the  law  had  "proved  injurious  to  the  pub- 
lic," and  that  "the  dangers  of  speculation  have 
increased."  We  have  high  authority  for  a  de- 
tailed examination  of  the  disaster  attending  this 
costly  experiment  in  the  remarks  of  Professor 
Emery,  who  tells  us  not  merely  how  the  German 
law  failed,  but  why: 

(i)  Fluctuations  in  prices  have  been  increased  rather  than 
diminished.  The  corrective  influence  of  the  bear  side  of  the 
market  having  been  restricted,  the  tendency  to  an  inflated 
bull  movement  was  increased  in  times  of  prosperity.  This  in 
turn  made  the  danger  of  radical  collapse  all   the   greater   in 


240  THE  STOCK  EXCHANGE  FROM  WITHIN 

proportion  as  the  bull  movement  was  abnormal.  The  greater 
funds  needed  to  carry  stocks  on  a  cash  basis  further  increased 
the  danger  when  collapse  was  threatened.  The  result  was 
an  increased  incentive  to  reckless  speculation  and  manipula- 
tion. Says  the  report  of  1907,  "The  dangers  of  speculation 
have  been  increased,  the  power  of  the  market  to  resist  one- 
sided movements  has  been  weakened,  and  the  possibilities  of 
misusing  inside  information  have  been  enlarged." 

(2)  The  money  market  has  been  increasingly  demoralized 
through  the  greater  fluctuations  in  demand  for  funds  to 
carry  speculative  cash  accounts.  The  New  York  method  is 
held  in  abhorrence  by  German  financiers,  who  attribute  to 
it,  in  large  part,  the  wild  fluctuations  in  New  York  call  rates, 
the  frequent  "money  panics"  and  the  tendency  to  reckless 
"jobbery."  In  proportion  as  the  new  Berlin  methods  ap- 
proached the  cash  delivery  system  of  New  York,  these  evils 
have  appeared  there. 

(3)  The  business  of  the  great  banks  has  been  increased 
at  the  expense  of  their  smaller  rivals.  The  prohibition  of 
trading  for  the  account  made  it  difficult  for  the  latter  to 
carrj^  out  customer's  orders  because  the  new  methods 
required  large  supplies  of  both  cash  and  securities.  Further- 
more, an  increasing  share  of  the  business  of  the  large  banks 
came  to  be  settled  by  offsets  among  their  customers,  and 
the  actual  exchange  transactions  became  a  proportionally 
small  part  of  the  total  transfers. 

(4)  This  has  a  twofold  effect.  Business  within  the  banks 
is  done  on  the  basis  of  exchange  prices,  but  these  became 
more  fluctuating  and  subject  to  manipulation  as  the  quantity 
of  exchange  dealings  were  diminished  and  were  concentrated 
in  a  few  hands.  The  advantages  of  a  broad  open  market 
were  lost.  The  object  of  the  act  had  been  to  lessen  the 
speculative  influence  over  industrial  undertakings.  Its  eflFect 
was  to  increase  it. 

(5)  Finally,  the  effect  of  interference,  increased  cost,  and 


LEGISLATION  241 

legal  uncertainty  was  to  drive  business  to  foreign  exchanges 
and  diminish  the  power  of  the  Berlin  Exchange  in  the  field 
of  international  finance.  The  number  of  agencies  of  foreign 
houses  increased  four  or  five  fold  and  much  German  capital 
flowed  into  other  centres,  especially  London,  for  investment 
or  speculation.  This  in  turn  weakened  the  power  of  the 
Berlin  money  market,  so  that  even  the  Reichbank  has  at 
times  felt  its  serious  effects.* 

Concerning  the  "Exchange  Register"  (which 
the  government  has  now  abolished  as  a  complete 
failure)  and  the  effort  to  keep  the  public  out  of 
the  speculative  markets,  Professor  Emery  says: 

In  one  sense  the  fate  of  the  famous  exchange  register  is 
laughable,  but  in  a  deeper  sense  it  is  genuinely  sad,  for  the 
object  was  a  worthy  one  and  the  new  scheme  was  adopted 
with  high  hopes.  Its  failure  was  inevitable,  since  it  did  not 
remove  the  temptation  to  speculate.  The  men  who  felt 
this  temptation  most,  and  whose  position  least  warranted 
their  yielding  to  it,  were  of  course  the  very  last  men  to  have 
themselves  registered.  In  fact  the  whole  public  revolted. 
The  number  of  registrations  never  reached  four  hundred, 
which  number  would  not  begin  to  cover  the  banking  and 
brokerage  concerns.  The  number  of  "Outsiders"  registered 
never  reached  forty.  Even  the  conservative  banks  had  to 
choose  between  giving  up  all  such  business  and  dealing  with 
non-registered  parties. 

(i)  The  uncertainties  of  the  new  situation  were  most  likely 
to  exclude  the  cautious  and  well-to-do  from  participation  in 
the  market.  The  reckless  gambler  of  small  means  was  less 
likely  to  be  disturbed  in  his  practices. 

(2)  The  act  aimed  to  establish  legal  certainty  by  means 

*"Ten  Years  Regulation  of  the  Stock  Exchange  in  Germany,"  by 
Henry  Crosby  Emery  in  the  Yale  Review,  May,  1908. 


242  THE  STOCK  EXCHANGE  FROM  WITHIN 

of  registration.  It  proved  a  direct  incentive  to  fraud. 
The  customer  was  not  legally  liable  on  his  contracts;  there- 
fore, every  reckless  and  dishonest  little  plunger,  who  could 
get  a  broker  to  trust  him,  could  take  a  "flyer"  with  every- 
thing to  gain  and  nothing  to  lose.  Cases  increased  rapidly 
in  the  courts  and  the  worst  element  of  the  public  was  active 
to  the  relative  exclusion  of  the  better.  Instances  even 
occurred  where  a  man  would  play  both  sides  of  the  market 
at  the  offices  of  two  different  brokers  and  simply  refuse  to 
settle  on  the  losing  contract. 

(3)  As  affecting  this  phase  of  the  question,  references 
should  be  made  again  to  the  transfer  of  business  to  foreign 
exchanges.  Morally  and  socially  it  is  as  bad  for  the  German 
public  to  speculate  in  cheap  mining  stocks  on  the  London 
Exchange  as  to  do  so  at  home.  The  flow  of  German  funds 
into  the  market  for  South  African  securities  would  indicate 
a  further  way  in  which  the  purposes  of  the  act  were  defeated. 

(4)  Finally,  the  question  must  be  faced  of  the  effect  of 
eliminating  the  public  from  the  speculative  market  even  if 
it  could  be  accomplished.  It  is  supposed  sometimes  that 
such  a  result  would  be  all  benefit  and  no  injury.  On  the 
contrar}^,  the  real  and  important  function  of  speculation 
in  the  field  of  business  can  only  be  performed  by  a  broad 
and  open  market.  Though  no  one  would  defend  individual 
cases  of  recklessness  or  fail  to  lament  the  disaster  and  crime 
oonietimes  engendered,  the  fact  remains  that  a  "purely  profes- 
sional market"  is  not  the  kind  of  market  which  best  fulfills  the 
service  of  speculation.  A  broad  market  with  the  participation 
of  an  intelligent  and  responsible  public  is  necessary.  A  narrow 
professional  market  is  less  serviceable  to  legitimate  investment 
and  trade  and  much  more  susceptible  of  manipulation.* 

It  is  not  surprising  that  such  a  law,  enacted 
to  meet  political  clamor,  in  defiance  of  the  recom- 

*lbid. 


LEGISLATION  243 

mendations  of  the  committee,  and  in  the  face  of 
all  the  economic  experiences  of  the  century,  should 
have  proved  a  fiasco  in  a  double  sense.  Not  only 
did  it  fail  to  accomplish  its  purpose,  but,  as  we 
have  seen,  it  brought  about  a  new  chain  of  evils 
vastly  more  distressing  to  German  commercial 
development  than  all  the  evils  that  gave  it  birth. 
The  report  of  the  Deutsche  Bank  for  1900  said: 
"The  prices  of  all  industrial  securities  have  fallen. 
This  decline  has  been  felt  all  the  more  as,  by  reason 
of  the  ill-conceived  Bourse  Law,  it  struck  the 
public  with  full  force  without  being  softened 
through  covering  purchases  of  speculative  in- 
terests." Four  years  later  the  same  bank 
reported:  "A  serious  political  surprise  would 
cause  the  worst  panic,  because  therfe  are  no  longer 
any  dealers  to  take  up  the  securities  which,  at 
such  times,  are  thrown  upon  the  market  by  the 
speculating  public."  In  1905  the  bank  again 
forcibly  urged  the  revision  of  the  law  in  these 
words : 

"In  our  last  report  we  referred  to  the  great 
danger  which  may  be  brought  about  through 
delaying  the  revision  of  the  Bourse  Laws,  and 
we  are  now  pointing  to  it  again  because  we  con- 
sider it  our  duty  to  impress  again  and  again  a 
wider  circle  of  the  public  with  the  economic 
value  of  the  Stock  Exchange  and  its  important 


244  THE  STOCK  EXCHANGE  FROM  WITHIN 

relation  to  our  financial  preparedness  in  times  of 
war." 

Again,  the  following  year  the  bank  kept  pound- 
ing away  on  the  same  theme:  "If  it  had  still 
been  necessary  to  furnish  proof  of  the  regrettable 
fact  that  the  German  Bourses  are  no  longer  able 
to  accomplish  their  task  —  equally  important  to 
the  welfare  of  the  people  as  to  the  standing  of  the 
Empire  —  the  trend  of  events  during  the  past 
financial  year  in  general,  and  the  result  of  the  last 
German  Government  issues  in  particular,  would 
have  furnished  that  proof." 

Meanwhile,  other  leading  financial  institutions 
took  up  the  same  cry.  Thus  the  Dresdner  Bank 
in  its  report  in  1899  said:  "The  danger  which 
lies  in  the  ban  put  on  speculation,  especially  in  the 
prohibition  of  trading  for  future  delivery  in 
mining  and  industrial  securities,  will  become 
manifest  to  the  public,  if,  with  a  change  of  eco- 
nomic conditions,  the  unavoidable  selling  force 
cannot  be  met  by  dealers  willing  and  able  to  buy. 
It  will  then  be  too  late  to  recognize  the  harm- 
ful effects  of  the  Bourse  Law."  In  1902  the 
Disconto-Gesellschaft  reports:  "The  unfortunate 
Bourse  Laws  continue  to  be  a  grave  obstacle  to 
business  activity."  And  again  in  1903:  "The 
Bourse  will  not  be  able  to  resume  its  impor- 
tant  economic    functions    until    the    restrictions 


LEGISLATION  245 

upon  trading  for  future  delivery  have  been  re- 
moved. "* 

The  lesson  to  be  learned  from  the  failure  of  the 
German  Bourse  Law  of  1896,  and  from  the  frank 
recognition  of  that  failure  as  evidenced  by  the 
repeal  of  1908,  cannot  be  overestimated  in  its 
importance.  It  is  inconceivable  that  law-makers 
of  to-day  may  ignore  such  a  warning.  I  have 
quoted  freely  from  Professor  Emery  of  Yale  Uni- 
versity in  pointing  out  the  deplorable  results  of 
that  legislation  because  his  study  of  the  subject 
has  made  him  the  foremost  authority.  The  re- 
monstrances of  the  German  banks  and  business 
men  have  also  been  cited  because  they  were  on 
the  spot;  they  saw  and  felt  the  prostration  of 
German  business  that  followed  swiftly  on  the 
heels  of  this  law;  they  were  a  unit  in  pronouncing 
it  a  wretched  failure.  In  the  appendix  to  this 
work  will  be  found  the  report  of  the  Hughes 
Commission  in  which  the  ten  experts  on  that  board 
unanimously  reported  "the  evil  consequences" 
of  Germany's  experiment,  its  "grotesque"  opera- 
tion in  practice,  and  its  utter  failure. 

It  is  a  simple  matter  for  the  querulous  and 
discontented  element  of  a  community  to  reason 
along  the  lines  of  least  resistance  and  demand  the 


*  "The  German  Bourse  Law,"  by  G.  Plochmann,  North  American  Review, 
May,  1908, 


246  THE  STOCK  EXCHANGE  FROM  WITHIN 

enactment  of  laws  to  right  every  fancied  wrong. 
But  the  patient  study  of  such  matters,  the  nice 
balancing  of  probabilities,  the  penetrating  investi- 
gation of  similar  experiments  elsewhere  and  the 
analysis  of  their  bearing  on  the  larger  affairs 
affected  by  them  —  all  this  requires  critical 
judgment  of  a  high  order.  When  such  an  issue 
is  evolved  laymen  stand  aside  for  a  while,  until 
the  evidence  of  experts  has  been  submitted  to 
minds  competent  to  decide  in  accordance  with 
evidence. 

Applying  this  principle  to  the  ever-present 
menace  of  legislation  in  America  directed  against 
the  Stock  Exchange,  we  find  each  witness  testi- 
fying to  the  fact  that  the  German  law  of  1896,  far 
from  benefiting  the  public,  injured  it  immeasur- 
ably. It  put  a  premium  on  reckless  speculation 
and  offensive  manipulation;  it  demoralized  the 
money  market;  it  choked  the  small  banks  and 
made  virtual  monopolies  of  the  large  ones;  just 
in  proportion  as  it  stifled  speculation  it  put  an 
end  to  industrial  undertakings  that  depend  for 
their  success  upon  the  spirit  of  adventure  and 
risk;  it  drove  money  and  credit  out  of  Germany 
and  into  London  and  Paris;  it  removed  from  the 
Berlin  market  the  support  of  the  bears,  thus 
exposing  the  whole  investment  structure  to 
violent  collapse.     The  layman  must  consider  this 


LEGISLATION  247 

and  the  men  who  make  our  laws  must  look  before 
they  leap. 

Speculators  in  the  region  of  criticism,  whether 
of  theology  or  economics,  who  find  themselves  face 
to  face  with  a  fact  too  stubborn  to  fit  in  with 
their  opinions  or  conclusions,  have  but  two  courses 
open  to  them:  either  to  reconsider  in  the  light 
of  testimony  the  conclusions  they  have  reached, 
or  to  denounce  and  discredit  the  inconvenient 
witness.  In  this  instance  the  inconvenient  wit- 
ness cannot  be  denounced;  his  name  is  legion. 
Every  merchant  in  Germany  will  tell  you  the 
Bourse  Law  was  a  sad  mistake  and  will  deplore 
its  enactment.  Nor  can  such  witnesses  be  dis- 
credited; therefore  the  advocate  who  believes 
that  in  legislation  lies  the  remedy  for  what  he 
conceives  to  be  the  evils  of  speculation  must 
perforce  choose  the  other  horn  of  the  dilemma; 
he  must  reconsider. 

It  is  a  gratifying  fact  that  in  America,  where 
law-makers  are  prone  to  enact  a  hodge-podge  of 
laws  on  every  conceivable  subject,  there  has  been 
no  such  serious  mistake  made  by  the  Federal 
Government  as  that  which  occurred  in  Germany. 
In  18 1 2,  five  years  before  the  New  York  Stock 
Exchange  was  organized,  an  act  was  passed  by 
the  New  York  State  Legislature  entitled  "An  act 
to  regulate  sales  at  public  auction  and  to  prevent 


248  THE  STOCK  EXCHANGE  FROM  WITHIN 

stock-jobbing,"  its  essential  purpose  being  the 
prevention  of  short  selHng  —  the  bete-noir  of 
all  the  early  amateurs  in  economics.  This  was 
the  only  anti-speculation  act  ever  placed  on  the 
New  York  Statute  books.     The  act  read : 

That  all  contracts,  written  or  verbal,  hereafter  to  be  made, 
for  the  sale  or  transfer,  and  all  wagers  concerning  the  prices, 
present  or  future,  of  any  certificate  or  evidence  of  debt 
due  by  or  from  the  United  States  or  any  separate  State, 
or  any  share  or  shares  of  stock  of  any  bank,  or  any  share 
or  shares  of  stock  of  any  company,  established  or  to  be 
established  by  any  law  of  the  United  States,  or  any  individual 
State,  shall  be,  and  such  contracts  are  hereby  declared  to 
be,  absolutely  void,  and  both  parties  are  hereby  discharged 
from  the  lien  and  obligation  of  such  contract  or  wager; 
unless  the  party  contracting  to  sell  and  transfer  the  same 
shall  at  the  time  of  making  such  contract  be  in  actual  pos- 
session of  the  certificate  or  other  evidence  of  such  debt  or 
debts,  share  or  shares,  or  to  be  otherwise  entitled  in  his  own 
right,  or  duly  authorized  or  empowered  by  some  person  so 
entitled  to  transfer  said  certificate,  evidence,  debt  or  debts, 
share  or  shares  so  to  be  contracted  for.  And  the  party 
or  parties  who  may  have  paid  any  premium,  differences  or 
sums  of  money  in  pursuance  of  any  contract,  hereby  declared 
to  be  void,  shall  and  may  recover  all  such  sums  of  money, 
together  with  damages  and  costs,  by  action  on  the  case,  in 
assumpsit  for  money  had  and  received  for  the  use  of  the 
plaintiff  to  be  brought  in  any  court  of  record.* 

The  effect  of  this  law  was  precisely  the  same  as 
that  which  followed  the  enactment  of  Sir  John 


*"An  act  to  regulate  sales  at  public  auction  and  to  prevent  stock-jobbing," 
New  York  State  Legislature,  1812. 


LEGISLATION  249 

Barnard's  Law  of  1734  in  England;  it  did  not 
prevent  short  selling,  it  accomplished  no  useful 
purpose,  and  it  merely  served  to  enable  unscrupu- 
lous speculators  to  "welch"  on  their  contracts. 
In  1858  it  was  repealed,  and  short  selling,  having 
demonstrated  its  usefulness  in  many  ways,  was 
thenceforth  declared  to  be  legal  in  a  statute  which 
read  as  follows : 

No  contract,  written  or  verbal,  hereafter  made  for  the 
purchase,  sale,  transfer,  or  delivery  of  any  certificate  or 
other  evidence  of  debt  due  by  or  from  the  United  States,  or 
any  separate  State,  or  of  any  share  or  interest  in  the  stock 
of  any  bank,  or  of  any  company  incorporated  under  the 
laws  of  the  United  States,  or  of  any  individual  State,  shall 
be  void  or  voidable  for  want  of  consideration,  or  because  of 
the  non-payment  of  any  consideration,  or  because  the 
vendor,  at  the  time  of  making  such  contract,  is  not  the 
owner  or  possessor  of  the  certificate  or  certificates,  or  other 
evidence  of  such  debt,  share  or  interest.* 

The  United  States  Government's  attempt  to 
regulate  or  restrict  speculation  is  confined  to  a 
single  instance,  the  Gold  Speculation  Act  of  1864, 
a  law  which  enjoyed  a  brief  existence  of  but  fifteen 
days.f  In  1864  there  were  large  issues  of  paper 
currency  that  drove  gold  out  of  circulation  and 
caused  it  to  be  bought  and  sold  as  any  other 
commodity.     Thus    a    large    supply   of   gold    fell 

*  "An  act  to  regulate  sales  at  public  auction  and  to  prevent  stock-jobbing," 
New  York  State  Legislature,  1858,  repealing  act  of  1812. 
t  "Statutes  at  Large,"  Ch.  127  and  Ch.  209,  repealing  Ch.  127. 


2  50  THE  STOCK  EXCHANGE  FROM  WITHIN 

into  the  hands  of  speculators,  and  as  its  price  rose 
more  than  lOO  per  cent.,  the  public  jumped  to 
the  conclusion  that  this  portentous  increase  was 
due  to  the  operations  of  speculators,  and  that  the 
rise  could  be  stopped  by  prohibiting  such  prac- 
tices, hence  all  gold  speculation  was  forbidden 
by  statute.  As  a  fallacy  this  was  monumental. 
Professor  Hadley  tells  the  story  in  this  way: 

The  effect  was  precisely  the  opposite  of  what  had  been 
anticipated.  Every  man  who  was  engaged  in  foreign  trade 
had  to  provide  security  for  being  able  to  make  gold  payments 
in  the  immediate  future,  if  called  upon  to  do  so.  Being 
prevented  from  dealing  with  speculators,  he  now  had  to 
accumulate  a  reserve  of  his  own.  This  caused  an  increased 
demand  for  gold  at  a  time  when  it  was  unusually  difficult  to 
maintain  an  adequate  supply.  Under  two  weeks'  operation 
of  the  act  the  price  of  a  hundred  gold  dollars  rose  from  about 
two  hundred  paper  dollars  to  very  nearly  three  hundred.  So 
obvious  was  its  evil  effect  that  it  was  hurriedly  repealed 
as  a  means  of  preventing  further  commercial  disasters. 

Again,  in  the  earlj^  part  of  1866,  there  was  a  rise  in  the 
price  of  gold,  which  was  attributed  by  public  opinion  to 
the  speculators.  Their  machinations  were  defeated,  not  by 
legislation,  but  by  the  issue  to  the  market  of  a  part  of  the 
gold  lying  in  the  Treasury  of  the  United  States.  For  the 
moment  the  price  of  gold  fell  and  people  rejoiced  that  the 
plans  of  the  speculators  had  been  defeated.  But  a  short 
time  later,  when  the  war  between  Prussia  and  Austria  caused 
a  demand  for  gold  in  Europe,  there  were  large  exports  of 
the  metal,  and  its  price  arose  by  natural  causes.  The  United 
States  was  obliged  to  buy  back,  at  a  decided  loss,  a  part  of 
the  gold  which  the  Treasury  had  so  unwisely  issued. 


LEGISLATION  251 

It  turned  out  in  the  end  that  the  operations  of  the  specu- 
lators in  anticipating  the  wants  of  the  future  would  have 
prevented  a  loss  to  the  country,  and  that  the  attempt  of  the 
Treasury  to  defeat  those  operations  was  attended  with 
expense  both  to  the  government  and  to  the  mercantile 
community.* 

Mr.  Horace  White  deals  with  the  gold  specula- 
tion of  the  '6o's  as  follows: 

During  seventeen  years  the  business  of  the  country  was 
regulated  by  the  quotations  of  the  Gold  Exchange.  The 
export  trade  of  the  country  necessitated  the  selling  of  gold 
in  advance  of  its  delivery.  A  buyer  of  wheat  or  cotton  for 
export  would  make  his  purchase  according  to  the  current 
price  of  gold,  but  he  would  not  get  his  returns  from  abroad 
in  some  weeks.  If  the  price  of  gold  should  fall,  meanwhile, 
he  would  be  a  loser.  So,  he  would  sell  at  once  the  gold  he 
expected  to  receive  later.  .  .  .  Black  Friday  and  its  evil 
consequences  were  due  to  the  existence  of  a  bad  currency 
and  a  fluctuating  standard  of  value.  The  Gold  Room 
was  at  that  time  a  necessity.  Business  could  not  be  carried 
on  without  it,  but  it  offered  temptations  and  facilities  for 
gambling  which  could  not  be  resisted.! 

In  the  various  States  of  the  Union,  where  law- 
making goes  on  all  the  time  with  surprising  zeal, 
there  Is,  of  course,  a  bewildering  array  of  crazy- 
qullt  laws  on  the  statute  books  dealing  with  specu- 
lation, but  these  are  relatively  unimportant.  Some 
of  the  States,  Wisconsin,  Louisiana,  California, 
Montana,    North    Dakota,    and    South    Dakota, 

*  "Economics,"  by  Arthur  T.  Hadlej',  New  York,  1896. 

t  "Money  and  Banking,"  by  Horace  White,  New  York,  1895. 


252  THE  STOCK  EXCHANGE  FROM  WITHIN 

have  laws  similar  to  those  of  New  York  State, 
legalizing  short  sales  of  commodities  and  securities. 
Other  States  prohibit  dealing  in  futures,  short  sales, 
corners,  forestalling  and  speculation  in  general, 
and  two  States  actually  license  bucket-shops*. 

It  by  no  means  follows  because  of  the  failure 
of  the  German  Bourse  Law  of  1896  and  of  all 
similar  earlier  attempts  to  regulate  or  restrict 
speculation,  that  the  issue  has  become  moribund 
and  that  nothing  more  will  be  heard  of  it.  On 
the  contrary,  just  as  each  one  of  these  abortive 
attempts  at  legislation^  and  each  of  the  Govern- 
ment Commissions  we  have  described  grew  out 
of  excess  in  speculation  and  consequent  losses  to 
the  public,  so,  no  doubt,  future  extravagance  in 
the  world  of  speculative  undertakings  will  be 
attended  by  similar  outcries  and  similar  results. 
There  were  debates  in  Congress  for  three  years  over 
the  Hatch  Anti-Option  Bill,  and  while  this  measure 
failed  of  enactment  into  law,  something  akin  to  it 
will  no  doubt  come  up  again  one  day  when  the 
public  is  in  the  mood. 

It  is  probably  true  that  in  such  event  the  lessons 
taught  by  earlier  legislative  experiments,  and 
particularly  by  the  German  fiasco,  will  have  their 

*  In  the  appendix  to  his  work,  "Some  Thoughts  on  Speculation,"  New 
York,  1909,  Mr.  Frank  Fayant  gives  a  summary  of  the  laws  of  all  the 
States,  pp.  57-58.  I  am  greatly  indebted  to  this  pamphlet  for  many 
authorities  quoted  in  this  chapter. 


LEGISLATION  255 

effect  In  checking  hasty  legislation;  in  any  event 
it  would  seem  Impossible  that  the  teachings  of. 
all  the  economists  —  scientific  contributions  to 
literature  that  to-day  comprise  a  large  library  — 
can  be  ignored  in  any  future  discussion  of  this 
subject.  Meantime,  accepting  as  our  major  pre- 
mise the  enduring  presence  of  speculation  as  a 
fixed  and  immutable  characteristic  of  human 
nature  the  world  over  —  there  remains  the  plain 
warning  to  Stock  Exchanges  and  their  gov- 
ernors that  fences  must  be  mended  as  gaps 
occur,  and  that  the  control  of  the  business  in  the 
interest  of  the  public  must  be  the  loyal  motive 
of  all  these  institutions.  It  will  not  suffice  to 
whitewash  indefensible  conditions,  nor  to  hide 
from  public  scrutiny  any  detail  of  a  business  which 
that  public  is  asked  to  support.  Conversely,  it 
may  be  pertinent  to  say  that  in  the  effort  to 
remedy  some  of  the  evils  of  speculation  the  pri- 
vate citizen  has  his  responsibilities  as  well  as  the 
stockbroker. 

Looking  forward  toward  the  great  questions 
of  the  future  having  to  do  with  State  regulation 
of  industry  and  commerce  of  which  the  Stock 
Exchange  is  a  part,  the  student  finds  no  solution 
so  satisfactory  as  the  doctrine  of  laissez  faire, 
assuming  always  that  those  in  control  of  the 
business  under  scrutiny  shall  do  their  full  duty. 


254  THE  STOCK  EXCHANGE  FROM  WITHIN 

Under  the  policy  England  has  risen  to  unex- 
ampled commercial  supremacy,  while  America, 
because  serious  mistakes  have  been  made,  finds 
its  advocates  of  State  regulation  growing  daily 
in  number,  with  consequent  danger  to  all  its 
delicate  commercial  machinery. 

In  these  circumstances  how  has  the  Exchange 
met  its  duties  and  Its  responsibilities?  The  an- 
swer Is  to  be  found  in  Its  records  for  the  year  191 3. 
Prior  to  that  time  there  was  undeniably  a  careless 
acceptance  of  old  standards  without  inquiring  too 
closely  into  them;  letting  things  drift  was  the  rule. 
But  It  Is  never  too  late  to  mend,  and  In  191 3  the 
Exchange  met  the  issues  squarely. 

Manipulation  was  stopped,  in  so  far  as  it  can  be 
stopped,  by  the  famous  resolution  of  February  5, 
191 3,  reading  as  follows: 

"At  a  meeting  of  the  Governing  Committee 
held  this  day,  the  following  resolution  was  adopted: 

^'Resolved:  That  no  Stock  Exchange  member,  or  member 
of  a-  Stock  Exchange  firm,  shall  give,  or  with  knowledge  exe- 
cute, orders  for  the  purchase  or  sale  of  securities  which  would 
involve  no  change  of  ownership. 

"The  punishment  for  this  offense  shall  be  as  prescribed  in 
Section  8  of  Article  XXIII  of  the  Constitution  regarding  ficti- 
tious transactions." 

Trading  on  Insufficient  margins  was  stopped  by 
the  resolution  of  February  13,  191 3,  as  follows: 


LEGISLATION  255 

"Ata  meeting  of  the  Governing  Committee  held  this  day, 
the  following  resolutions  were  adopted: 

"That  the  acceptance  and  carrying  of  an  account  for  a  cus- 
tomer, either  a  member  or  a  non-member,  without  proper  and 
adequate  margin,  may  constitute  an  act  detrimental  to  the 
interest  and  welfare  of  the  Exchange,  and  the  offending  mem- 
ber may  be  proceeded  against  under  Section  8  of  Article  XVII 
of  the  Constitution. 

"That  the  improper  use  of  a  customer's  securities  by  a 
member  or  his  firm  is  an  act  not  in  accordance  with  just  and 
equitable  principles  of  trade,  and  the  offending  member  shall 
be  subject  to  the  penalties  provided  in  Section  6  of  Article 
XVII  of  the  Constitution. 

"That  reckless  or  unbusinesslike  dealing  is  contrary  to  just 
and  equitable  principles  of  trade,  and  the  offending  member 
shall  be  subject  to  the  penalties  provided  in  Section  6  of  Article 
XVII  of  the  Constitution,  in  every  case  in  which  the  offense 
does  not  come  within  the  provisions  of  Section  "  jf  Article 
XVI  thereof." 

It  is  one  thing  to  adopt  a  rule,  but  it  is  quite 
another  to  enforce  it.  In  order  that  there  might  be 
no  miscarriage  on  this  point,  the  Exchange  on 
■March  5,  1913,  took  the  one  necessary  step  to 
make  these  reforms  efTective  by  the  appointment 
of  a  Committee  on  Business  Conduct,  as  follows: 

"Fourth:  A  Committee  on  Business  Conduct,  to  consist 
of  five  Members. 

"It  shall  be  the  duty  of  this  Committee  to  consider  matters 
relating  to  the  business  conduct  of  members  with  respect  to 
customers'  accounts. 

"  It  shall  also  be  the  duty  of  this  Committee  to  keep  in  touch 
with  the  course  of  prices  of  securities  listed  on  the  Exchange, 


256  THE  STOCK  EXCHANGE  FROM  WITHIN 

with  the  view  of  determining  when  improper  transactions  are 
being  resorted  to. 

"It  shall  have  power  to  examine  into  the  dealings  of  any 
members  with  respect  to  the  above  subjects,  and  report  its 
findings  to  the  Governing  Committee." 

This  Committee  is  composed  of  Governors  of 
the  Exchange  in  actual  business  on  the  floor. 
Members  call  it  "The  Police  Committee,"  which 
is  correct.  Its  members  are  constantly  on  the 
watch  for  evidences  of  wrongdoing,  and  the  broad 
powers  entrusted  to  them  under  the  resolution 
above  quoted  give  them  ample  authority  to  act 
summarily.  I  have  watcKed  them  at  their  work 
and  I  have  no  hesitation  in  saying  that  this  Com.- 
mittee  is  the  most  important  influence  for  good 
that  has  ever  been  made  a  part  of  the  machinery 
of  any  stock  exchange  in  the  world.  The  most 
prejudiced  critic  of  the  Exchange  will  I  think  ad- 
mit the  truth  of  this  statement. 

These  three  important  additions  to  the  Stock" 
Exchange  machinery  have  met  all  the  objections 
thus  far  encountered.  They  are  broad  and  sweep- 
ing; they  are  rigidly  enforced  and  they  have  come 
to  stay.  Sooner  or  later  they  must  be  adopted 
and  enforced  by  all  exchanges  elsewhere.  I  think 
it  may  be  said  that  having  gone  so  far,  the  Ex- 
change has  tasted  the  fruits  of  a  great  moral  victory 
.and   finds   it   good.     It  follows    that   new   prob- 


LEGISLATION  257 

lems  as  they  arise  will  be  met  in  the  same  spirit. 
All  plans  can  be  improved,  all  work  can  be  better 
done.  The  main  thing  is  to  get  started  on  the 
right  path.  After  that  the  task  is  easy.  And  it 
is  immensely  satisfying  to  feel  that  the  Exchange 
has  definitely  chosen  to  hew  its  path  along  new 
lines  of  business  ethics. 

A  few  years  must  pass  no  doubt  before  the  public 
recognizes  the  Importance  of  these  reforms,  but  in 
the  end  they  must  be  recognized  and  appraised  at 
their  real  value.  Is  it  too  much  to  hope,  when 
that  day  dawns,  that  public  sentiment  will  force 
the  demagogue  and  the  notoriety-seeking  critic 
into  the  background,  and  cheerfully  give  the  Stock 
Exchange  a  hand.'*  Is  it  unreasonable  to  predict 
that  if  we  keep  our  house  in  order,  talk  of  incor- 
poration and  supervision  by  Albany  and  Washing- 
ton must  cease  .^  I  feel  strongly  that  this  is  to 
happen.  I  know  it  ought  to  happen,  and  those  of 
my  colleagues  who  have  worked  so  loyally  to  bring 
about  these  reforms  will  be  mighty  proud  and 
happy  when  it  does  happen. 


CHAPTER  VIII 

THE    DAY    ON    'cHANGE,    WITH    SUGGESTIONS 
FOR    BEGINNERS 


CHAPTER  VIII 

THE    DAY    ON     'cHANGE,    WITH    SUGGESTIONS 
FOR    BEGINNERS 

The  stockbroker's  praises  are  never  sung;  if 
he  has  good  qualities,  one  seldom  hears  of  them. 
Doctor  Parker  once  defined  the  Stock  Exchange 
as  the  "bottomless  pit":  Doctor  Johnson  said 
a  broker  was  "a  low  wretch";  politicians  vie  one 
with  another  in  painting  him  a  parasite  and  a  social 
excrescence.  Impatient  idealists  who  would  take 
a  short  cut  to  perfection  assert  that  he  is  of  no  real 
economic  value,  and  would  enact  laws  to  restrain 
him.  In  the  novels  and  on  the  stage  he  becomes 
sleek,  cunning,  convivial,  and  slippery,  while  there 
is  ever  about  him  a  rank  smell  of  money  and 
a  Machiavellian,  sublety  that  enables  him  to  get 
something  for  nothing.  Without  understanding 
him  and  without  comprehending  his  devious  ways, 
we  feel  somehow  that  he  lacks  what  Lord  Morley 
calls  "original  moral  impetus,"  and  that  in  some 
mysterious  way  there  is  a  stratagem  lurking  in 
all  his  actions.  When  he  enters  the  stage  or  the 
story  we  say: 

"By  the  pricking  of  my  thumbs, 
Something  wicked  this  way  comes." 
261 


262  THE  STOCK  EXCHANGE  FROM  WITHIN 

Members  of  the  Stock  Exchange  are  more  or 
less  familiar  with  Baron  Munchausen  and  Mother 
Goose  —  for  if  rumor  be  credited  both  these 
characters  live  in  Wall  Street  —  so  they  accept 
with  good  humor  the  epic  touch  of  playwright  and 
novelist  who  thus  take  poetic  liberties  with  them 
and  their  profession.  But  the  iron  enters  into 
their  souls  when  you  term  them  non-producers 
and  parasites,  and  long  into  the  night  they  will 
debate  it  with  heat,  bringing  down  the  lath  and 
plaster  on  their  detractors  with  the  heavy  artillery 
of  all  the  orthodox  economists,  and  painting  in 
gloomy  colors  the  picture  of  a  commercial  world 
without  its  great  Exchanges. 

At  such  times  they  become  very  earnest,  and  the 
listener,  who  perhaps  never  thought  of  it  before, 
com-es  away  at  least  partially  persuaded  that  soci- 
ety as  it  is  constituted  to-day  will  have  to  un- 
dergo a  very  decided  transformation  before  It  can 
get  along  without  the  machinery  of  which  these 
maligned  persons  are  so  important  a  part.  It  has 
stood  the  test  of  time;  it  has  come  to  stay;  its 
fundamental  idea,  economy  and  utility  in  trade, 
began  with  the  Agora  of  ancient  Greece  and  the 
Forum  of  Rome.  If  there  is  something  apocry- 
phal, then,  in  the  tradition  that  derides  the  pro- 
fession, here  at  least  is  evidence  of  its  early  origin, 
its  growth,  and  its  power  of  endurance.     In  any 


THE  DAY  ON  'CHANGE  263 

case,  membership  in  the  Stock  Exchange  is  to-day 
the  ambition  of  good  citizens  everywhere,  and 
affords  to  many  a  father  a  solution  of  the  question 
at  once  difficult  and  important,  "What  shall  we 
do  with  our  sons?" 

There  are  arguments  against  such  a  career, 
of  course,  just  as  there  are  against  all  roads  that 
lead  anywhere  this  side  Utopia,  but  nevertheless, 
a  man  with  capital,  average  intelligence,  and 
good  health,  daily  contributing  by  his  labor  to 
the  silent  forces  that  ebb  and  flow  within 
these  walls,  can  do  well  on  'Change  without  sacri- 
ficing anything  that  makes  for  self-respect  and 
without  diminishing  in  any  degree  his  value  as  a 
useful  member  of  the  community.  Moreover, 
he  is  free  from  things  sedentary  and  is  brought 
into  daily  contact  with  men  and  affairs  that 
broaden  and  instruct  him.  He  becomes  a  think- 
ing and  observing  person,  one  whose  mind  never 
becomes  atrophied  for  want  of  material  on  which 
to  feed.  He  must  be  equipped  with  patience 
and  philosophy  to  enable  him  to  endure,  without 
losing  his  nerve,  the  long  periods  of  dulness  that 
are  a  sorry  part  of  the  business,  but  he  will  not 
complain  of  wasted  days  if  he  learns  to  know  that 
waste  time,  like  waste  material,  may  be  converted 
into  valuable  by-products;  that  just  as  manu- 
facturers are  vigilant  in  turning  their  scrap-heaps 


264  THE  STOCK  EXCHANGE  FROM  WITHIN 

into  commercial  utilities,  so,  in  his  daily  economy 
the  Stock  Exchange  member  may,  if  he  has  the 
right  stuff  in  him,  turn  the  ashes,  slag,  and  refuse 
of  the  hour  into  things  of  practical  value.  Once 
he  has  learned  to  do  this,  the  novitiate  has  sur- 
mounted the  most  serious  obstacle  in  his  pro- 
fession. 

His  days  on  "the  floor,''  as  It  is  commonly 
termed,  will  bring  him  in  contact  with  many 
different  types.  He  will  find  here  all  that  is 
finest  in  human  character,  and  many  withering 
things  that  are  most  fatal  to  It;  these  he  may 
find  anywhere,  because  there  will  always  be  men 
who  carry  all  sail  and  no  ballast,  "men  who  can- 
not believe  life  real  until  they  make  it  fantastic.'* 
But  the  Stock  Exchange  Is  a  great  leveler;  in- 
fallibly its  swift  analysis  of  character  will  search 
him  out,  weigh  him  and  measure  him,  and  place 
him  just  where  he  deserves  to  be.  Nowhere  else 
among  business  men  does  this  silent  and  sure 
appraisal  of  worth  find  a  more  perfect  results 
It  has  nothing  to  do  with  the  size  of  one's  purse 
nor  the  blue  In  one's  veins;  it  takes  no  account  of 
what  a  man  has  been  nor  of  what  his  ancestors 
w^re.  Commercial  honor  Is  what  counts,  and 
within  these  four  walls  It  is  raised  to  a  high  plane 
and  maintained  with  reverence.  They  live  a 
touch-and-go  life,  with  quick  changes  and  nerves 


THE  DAY  ON  'CHANGE  265 

all  in  action,  but  they  make  no  mistakes  when 
they  analyze  character  in  their  great  crucible. 

Those  brutal  aphorisms,  "money  talks," 
"might  makes  right,"  "whatever  is,  is  right," 
and  all  similar  phrases,  become  meaningless  in 
the  matter-of-fact  subordination  of  externals 
that  one  witnesses  daily  on  'Change,  where  life 
is  stripped  of  all  save  elementals.  It  is  character 
that  "talks"  here,  not  money;  if  might  makes 
right,  it  is  the  might  of  decency  and  not  of  brute 
force  or  "pull";  whatever  is,  is  "right"  only  so 
far  as  it  conforms  to  the  code  of  gentlemen  and 
exalts  the  square  deal.  Unless  a  candidate  under- 
stands this  in  its  fullest  sense,  and  is  determined 
to  make  it  his  goal,  he  had  better  avoid  the  Stock 
Exchange.  Conversely,  we  find  in  this  critical 
atmosphere  another  reason  why  honorable  men 
are  ambitious  to  become  members,  for  it  is  some- 
thing inspiriting  to  have  won  the  discriminating 
approval  of  a  critical  assembly  abounding  in 
experience  and  guided  by  good  traditions. 

The  New  York  Stock  Exchange  is  an  association 
and  not  an  incorporated  body.  It  resembles  a 
club  in  Its  organization,  and  hence  through  its 
governing  board  it  exercises  a  control  over  its 
members  that  could  not  be  maintained  by  difi"er- 
ently  constituted  authority.  From  the  moment 
a    man    signs   that    Ark  of    the    Covenant,    the 


266  THE  STOCK  EXCHANGE  FROM  WITHIN 

constitution,  and  thereby  becomes  a  member, 
he  places  himself,  his  partners,  his  customers, 
his  employees,  his  books  and  all  his  business 
affairs  unreservedly  in  the  hands  of  the  Board  of 
Governors.  This  body,  which  is  composed  of 
members  of  the  Exchange,  is  chosen  in  classes  of 
ten,  by  the  full  Board  at  an  annual  election. 
It  consists  of  forty  members,  divided  into  eleven 
standing  committees,  of  some  of  which  the  Presi- 
dent, Vice-President,  and  Treasurer  are  also 
members. 

It  has  been  urged  In  times  past,  by  those  who 
have  not  understood  the  peculiar  powers  of  this 
Governing  Board,  that  the  Stock  Exchange  should 
Incorporate  in  the  manner  provided  by  law,  and 
thus  place  its  affairs  within  the  control  of  the 
State  authorities,  so  that  if  mistakes  occur  and 
wrongdoing  becomes  evident  offenders  may  be 
dealt  with  by  the  legal  authority  vested  in  the 
Courts.  But  the  essential  point  altogether  missed 
in  this  suggestion  lies  In  the  fact  that  the  absolute 
power  vested  In  the  Board  of  Governors,  by  the 
existing  plan,  gives  the  Stock  Exchange  authorities 
vastly  greater  control  over  Its  members  than  any 
law  on  the  statute  books  could  possibly  give.  The 
Hughes  Commission,  which  went  thoroughly  Into 
the  affairs  of  the  Stock  Exchange  in  1909,  recog- 
nized  this   fact,    and   its    report   emphasized   the 


THE  DAY  ON  'CHANGE  267 

point  that  if  changes  were  necessary  they  should 
come  from  within  the  Exchange  itself,  because 
of  the  broad  control  vested  in  it  by  its  consti- 
tution.* 

The  manner  In  which  the  Board  of  Governors 
handles  offences  as  they  occur,  and  the  way 
punishment  is  meted  out,  would  not  have  a  con- 
stitutional leg  to  stand  on  if,  as  an  incorporated 
body,  offenders  could  invoke  their  legal  privileges. 
Under  its  present  organization,  for  example,  the 
Board  may,  if  it  sees  fit,  intercept  and  cut  off  a 
member's  telephone  connection;  it  may  dictate 
with  whom  he  may  or  may  not  do  business,  and 
in  its  wisdom  it  may  determine  how,  when,  and 
where  that  business  shall  be  conducted.  If  it  Avere 
an  incorporated  body  and  each  offender  could 
resort  to  the  courts  in  instances  such  as  I  have 
cited,  what  would  become  of  its  rules,  and  how 
could  the  Exchange  authorities  maintain  its 
absolute  determination  to  protect  the  public  at 
all  hazards.^  Under  the  existing  system,  which 
true  friends  of  the  Exchange  and  of  the  public 
may  well  wish  to  see  maintained,  the  governors  are 
enabled  to  find  the  direct  way  and  the  common- 
sense  way,  without  being  blocked  by  a  jungle 
of  legal  technicality.     They  are  not  to  be  delayed 


*  The  London  Stock  Exchange  is  also  an  unincorporated  body.     See  pp. 
231  et  seq  for  the  report  of  the  royal  commission  bearing  on  this  matter. 


268  THE  STOCK  EXCHANGE  FROM  WITHIN 

or  restricted  hy  alibis,  by  pleas  of  immunity,  or 
by  States'  evidence,  nor  are  they  to  be  interfered 
with  by  the  rain  of  legal  writs  through  which  an 
accused  man,  in  the  courts,  may  twist  and  double 
and  block  and  delay  the  punishment  for  his  sins, 
if  sins  there  be. 

Wonderment  is  often  expressed  by  men  in  other 
lines  of  business  at  the  severity  of  the  punishment 
sometimes  inflicted  by  the  governors  in  this 
autocratic  control.  To  expel  or  even  to  suspend 
a  member,  and  thus  bring  upon  him  great  pecuni- 
ary loss  as  well  as  disgrace,  all  because  of  an 
offence  which-  might  go  unpunished  in  other 
professions,  naturally  seems  to  an  outsider  to  be 
unnecessarily  severe.  The  answer  to  this  is, 
of  course,  that  the  governors,  recognizing  their 
great  duty,  accept  as  a  public  trust  the  power  and 
the  ability  to  maintain  it.  No  matter  whose  head 
is  hit,  the  rules  will  always  be  vigorously  enforced 
because  they  are  designed  to  protect  the  public  — 
a  public,  I  am  sorry  to  say,  that  has  not  always 
tried  to  understand  what  the  Exchange  stands  for. 
That  is  why  no  statute  of  limitations  can  interfere 
to  protect  any  one  of  its  members  from  the  pen- 
alties that  attend  a  departure  from  the  straight 
line  of  business  morality.  A  rigid  enforcement 
from  within  is  the  only  efficient  way,  and  no  one 
who  knows  the  governors  and  their  arduous  labors 


THE  DAY  ON  'CHANGE  269 

on  behalf  of  the  principle  for  which  the  Exchange 
stands  can  ever  doubt  it.  The  members  them- 
selves, no  matter  who  is  punished,  are  a  unit,  and 
an  enthusiastic  unit,  in  upholding  the  disciplinary 
action  of  the  governors  every  time. 

The  best  course  for  a  young  man  to  pursue 
who  wishes  to  become  a  member  is  first  to  spend 
a  year  or  more  as  clerk  in  a  well-regulated  broker's 
office.  The  business  is  by  no  means  intricate, 
and  there  are  details  with  which  he  should  famil- 
iarize himself.  If  in  future  years  his  partners 
are  absent,  he  can  then  go  over  his  firm's  books 
and  acquaint  himself,  as  he  should,  with  all  its 
affairs.  A  dishonest  partner  could  ruin  him,  or, 
what  is  worse,  disgrace  him,  for  the  governors 
recognize  no  distinctions  as  between  partners, 
nor  is  ignorance  accepted  as  an  excuse.  Office 
partners  who  are  not  members  of  the  Exchange 
do  not  always  understand  the  rules,  nor  the 
rigorous  spirit  in  which  they  are  enforced,  and 
just  as  the  Board  member  is  held  accountable  for 
his  partners,  so  he  must  pay  the  penalty  for  their 
misconduct. 

This  means  that  a  member  must  choose  his 
partners  carefully,  must  familiarize  himself  with 
what  they  are  doing,  and  must  know  how  to 
read  every  entry  on  the  firm's  books.  Then, 
too,  it  is  immensely  satisfactory  to  one  who  has 


270  THE  STOCK  EXCHANGE  FROM  WITHIN 

been  on  the  floor  all  day  and  more  or  less  out  of 
touch  with  his  office  details  to  learn  of  his  own 
knowledge  each  day,  before  he  goes  home,  just 
where  the  firm  stands.  He  looks  over  the  cus- 
tomers' accounts,  the  loans,  and  the  nature  and 
amount  of  the  firm's  unemployed  resources,  includ- 
ing its  balances  at  the  banks.  Such  a  man  sleeps 
well,  and  reduces  to  a  minimum  the  anxieties 
that,  at  critical  times,  make  of  this  a  nerve-racking 
occupation.  It  is  all  simple  enough,  and  in  the 
modern  methods  of  office  economy  in  bookkeeping 
he  can  do  it  without  loss  of  time.  Above  all  other 
considerations,  such  a  man  knows  his  business  thor- 
oughly from  top  to  bottom,  and  he  should  not  think 
of  investing  his  capital  on  any  other  basis. 

Perhaps  a  word  will  not  be  amiss  regarding 
partnership  agreements.  A  Stock  Exchange  com- 
mission business  is  one  that  should  be  conducted 
like  any  other  business  —  that  is  to  say,  reserves 
should  be  laid  aside  and  surplus  balances  created 
for  the  inevitable  rainy  day.  That  this  is  not 
done  by  all  brokerage  houses  in  the  way  it  should 
be  done  is  due  to  the  curious  habit  that  has 
grown  with  the  years,  whereby  stockbrokers  spend 
their  money,  uptown  and  down,  with  a  lavish 
hand.  Too  many  men  of  the  younger  generation 
thus  give  hostages  to  fortune  in  their  private 
extravagances  by  "drawing  down"  their  credit  bal- 


THE  DAY  ON  'CHANGE  271 

ances  as  fast  as  they  accrue.  "Easy  come,  easy 
go,"  seems  to  be  the  guiding  principle,  and  when 
hard  times  come,  as  come  they  must,  debit  balances 
are  created  that  soon  eat  into  capital  account. 

No  hard  and  fast  rule  can  be  laid  down  to 
meet  conditions  like  these,  but  the  best  method 
I  have  seen,  and  the  one  most  wisely  designed  to 
avoid  mishaps  for  beginners,  consists  in  a  partner- 
ship agreement  by  which  each  member  of  the  firm 
may  draw  a  monthly  sum,  worked  out  to  meet 
his  normal  requirements,  and  no  more.  All  that 
remains  is  then  turned  into  capital  account, 
where  it  draws  interest,  becomes  a  producer,  and 
grows  by  what  it  feeds  on.  I  have  in  mind  a  firm 
of  young  men  who  some  years  ago  resorted  to  this 
method  of  compulsory  saving,  with  such  success 
that,  despite  the  vicissitudes  of  the  passing  years, 
the  members  comprising  it  are  now  all  wealthy, 
attributing  their  good  fortune  wholly  to  this  wise 
and  provident  copartnership  agreement. 

New  York  Stock  Exchange  memberships  are 
obtained  in  only  one  way.  Having  assured  him- 
self that  he  can  meet  the  requirements  of  the 
Committee  on  Admissions,  and  having  pro- 
vided himself  with  two  sponsors,  the  candidate 
enters  into  negotiations  with  the  secretary  of  the 
Exchange  for  the  purchase  of  a  "seat,"  as  it  is 
termed.     As  there  are  only  iioo  members,  and  as 


272  THE  STOCK  EXCHANGE  FROM  WITHIN 

the  membership  Is  always  full,  he  must  either 
purchase  the  seat  of  a  deceased  member,  or  make 
a  bid  sufficiently  high  to  attract  a  seller.  He  may, 
of  course,  subject  to  approval  by  the  committee, 
inherit  a  seat  or  acquire  it  by  private  transfer, 
but  the  customary  process  is  to  buy  openly 
through  the  secretary,  a  salaried  officer  of  the 
Exchange,  whose  authority  in  matters  of  infinite 
detail  is  such  as  to  make  him  a  mighty  power  in 
executive  affairs.  Thereupon  he  pays  over  the 
purchase  price,  together  with  an  initiation  fee 
of  $2000,  and  presents  himself  and  his  sponsors 
before  the  Committee  on  Admissions.  ■ 

This  committee  first  calls  his  proposer,  and  then 
his  seconder,  and  they  are  subjected  to  a  careful 
inquiry  as  to  how  long  they  have  known  the 
candidate,  and  whether  in  a  business  or  social 
way;  his  qualifications  for  membership,  his  health, 
his  character  and  reputation,  and  his  previous 
business  experiences  are  all  subjected  to  a  micro- 
scopic scrutiny.  His  sponsors  are  also  asked  if 
in  the  ordinary  course  of  business  they  would 
accept   his   check  for  $20,000.*     If  the   answers 


*  The  question  put  to  sureties  on  the  London  Stock  Exchange  is,  "Would 
you  take  this  man's  checqae  for  £3000  in  the  ordinary  way  of  business?" 
to  which  an  unprepared  sponsor  once  replied,  "Well,  I  should  not  pick  it 
out." 

A  similar  question  by  the  governors  of  the  New  York  Stock  Exchange 
once  met  with  the  reply,  "Yes,  but  I  would  have  it  certified  as  quickly 
as  possible." 


THE  DAY  ON  :CHANGE  273 

to  these  questions  prove  satisfactory,  the  candi- 
date himself  is  summoned  and  put  through  a 
similar  examination.  As  his  name  has  been 
publicly  posted  on  the  bulletin  board  for  two 
weeks,  anything  detrimental  concerning  him 
will  probably  have  been  communicated  to  the 
authorities  before  he  is  examined,  but  if  not, 
provided  he  proves  satisfactory  and  the  particular 
department  of  Stock  Exchange  work  which  he 
proposes  to  undertake  meets  with  the  approval 
of  his  inquisitors,  and  provided  also  his  partners 
are  not  objectionable,  he  is  elected  to  membership 
after  he  signs  his  name  to  that  magnum  opus, 
the  constitution. 

The  price  paid  for  memberships  in  recent  years 
has  varied  widely  with  the  condition  of  the  times 
and  the  state  of  the  stock  market.  In  the  halcyon 
days  of  December,  1905,  and  the  opening  months 
of  1906,  there  were  several  transfers  at  ^95,000, 
the  high-water  mark.  Following  the  panic  of 
1907  seats  declined  in  December  of  that  year 
to  ^51,000  and  rose  again  in  1909  to  ^94,000. 
The  only  dues  are  ^100  annually,  together  with 
^10  voluntarily  paid  by  members  to  the  heirs  of 
each  of  their  deceased  colleagues,  but  this  amount 
is,  under  the  regulations  of  the  Exchange,  limited 
to  $150  annually,  the  balance,  if  more  than 
fifteen  members  die  in  any  one  year,  being  paid 


274  THE  STOCK  EXCHANGE  FROM  WITHIN 

out  of  reserve  funds.  The  sum  of  $10,000  which 
thus  accrues  to  the  heirs  of  deceased  members  is, 
of  course,  much  cheaper  than  any  other  form  of 
insurance.  The  Exchange  is  enabled  to  maintain 
it  by  the  $10  contribution  as  described,  and  the 
general  fund  is  kept  intact  because  the  iioo 
members  actually  contribute  $11,000,  of  which 
the  extra  $1000  is  set  aside  as  a  reserve,  which 
is  prudently  invested. 

If  we  accept  the  fallacious  argument  that  a 
thing  is  worth  just  what  one  can  get  for  it,  there 
can  be  no  argument  as  to  the  value  of  Stock 
Exchange  memberships,  but  that  is  not  the  way 
to  approach  the  subject.  It  may  be  said  with 
certainty  that  no  matter  how  much  has  been  paid 
in  the  past,  or  how  much  may  conceivably  be 
paid. in  the  future,  a  purchaser  who  devotes  to  his 
business  the  same  time  and  labor  that  he  would 
devote  to  any  other  business  in  which  a  similar 
capital  was  invested  will  always  be  able  to  earn 
a  good  return.  Those  awful  periods  of  stagnation 
will  appear  now  and  then,  and  accidents  in  the 
shape  of  losses  will  occur  and  return  again  to 
plague  him,  but,  nevertheless,  the  hard  worker 
will  find  no  cause  for  complaint  when  he  sums  up, 
let  us  say,  a  five-year  average.  This  is  demon- 
strated by  the  fact  that  it  is  only  on  rare  occasions 
a  Stock  Exchange  member  changes  his  vocation, 


THE  DAY  ON  'CHANGE  275 

which  is  another  way  of  saying  that  memberships 
are  held  at  high  prices  because  holders  are  pros- 
perous and  will  not  sell. 

In  considering  the  value  of  Stock  Exchange 
memberships  it  is  important  to  include  the 
"unearned  increment"  that  goes  with  them. 
Despite  all  that  may  be  said  against  it  by  members 
themselves,  who  in  dull  times  denounce  their 
calling  with  cynical  extravagance,  membership 
carries  with  it  certain  undefined  advantages. 
It  is  a  centre  of  the  financial  world  in  America; 
the  business  is  one  that  quickens  enterprise  and 
encourages  adventure;  it  undeniably  gives  a  man 
a  certain  standing  and  character  among  his 
fellows;  he  is  always  abreast  of  the  times,  his 
hours  are  not  long,  he  acquires  habits  of  deduction, 
analysis,  and  observation  that  sharpen  his  wits 
and  give  zest  to  life;  he  is  surrounded  at  all  times 
by  a  great  storehouse  of  wit,  wisdom,  and  experi- 
ence, and  from  the  very  nature  of  his  business 
he  is  often  brought  into  contact  with  important 
news  of  which  he  can  take  advantage  and  which 
may  lead  to  highly  profitable  opportunities 
for  investment  or  speculation.  He  would  be 
less  than  human  if  he  did  not  avail  himself  of 
such  opportunities,  and  the  business  would  lose 
much  of  its  enjoyment;  indeed  "the  tranquil- 
lity of  dispassionate  prudence"  of  which  Gold- 


276  THE  STOCK  EXCHANGE  FROM  WITHIN 

smith  speaks  may  easily  be  carried  too  far  on 
'Change. 

When  a  newly  elected  member  makes  his 
appearance  on  the  floor  he  is  taken  to  the  rostrum 
by  one  of  his  sponsors,  who  introduces  him  to 
the  Chairman.  That  formality  concluded,  he  is 
greeted  by  shouts  of  "New  Tennessee,"  and  is 
instantly  surrounded  by  a  howling  mob  of  young 
members  bent  on  initiating  him.  The  origin  of 
this  war-cry,  "New  Tennessee, "  is  an  enigma  one 
would  like  to  solve,  but  it  is  lost  in  obscurity. 
Even  the  board-room  antiquarians  have  no  clue. 
One  of  the  members  tells  me  that  his  grandfather, 
who  was  a  member  of  the  old  Exchange  that  stood 
at  the  corner  of  Wall  and  William  streets  in  the 
early  1830's,  often  told  him  that  the  phrase  was 
in  use  then,  just  as  it  is  to-day.  Its  early  origin, 
at  least,  is  thus  established,  and  one's  curiosity 
concerning  it  is  proportionately  increased.  How- 
ever it  originated,  it  remains  the  popular  slogan, 
and  when  a  shrill-voiced  member  in  any  part  of 
the  room  cries  out  above  the  din,  "New  Ten- 
nessee," there  a  crowd  of  the  boisterous  younger 
element  gathers  to  welcome  a  new  member.* 

To-day,  thanks  to  the  prudence  of  the  Com- 

*  A  similar  cry,  "Fourteen  hundred,"  was  long  used  for  the  same  purpose 
on  the  London  Stock  Exchange.  For  a  time  there  were  but  1399  members, 
and  each  stranger  who  appeared  was  thought  to  be  number  1400.  Hence, 
the  words  came  to  be  applied  to  all  new  members,  long  after  the  membership 
exceeded  that  figure. 


THE  DAY  ON  'CHANGE  277 

mittee  of  Arrangements  (which  has  charge  of  the 
board-room  discipHne),  the  hazing  of  new  members 
is  confined  to  harmless  pranks,  but  up  to  a  year 
ago  the  process  was  a  severe  one.  Newspapers 
rolled  into  clubs  were  used  to  beat  the  novitiate 
over  the  head;  he  was  pelted  with  everything 
within  reach;  his  collar  and  tie  were  torn  off,  and 
after  a  hundred  strong  young  men  had  thus 
jostled  and  mauled  and  pounded  him  all  over 
the  room,  he  was  a  sorry  sight.  It  began  to  be 
felt,  after  a  peculiarly  severe  hazing  of  this  sort, 
that  something  might  happen  one  day  to  bring 
reproach  upon  the  Exchange  and  sorrow  to  the 
members  themselves,  so  the  committee  wisely  put 
a  stop  to  the  practice. 

When  the  new  member  settles  down  to  serious 
work  he  will  find  open  to  him  several  different 
methods  of  doing  a  brokerage  business,  and  in 
this  respect  the  New  York  Exchange  differs 
widely  from  those  abroad.  In  London,  for 
example,  there  are  but  two  classes,  jobbers  and 
brokers,  to  only  one  of  which  a  member  may 
belong.  Until  very  recently  the  distinctions  be- 
tween the  two  classes  were  but  vaguely  defined, 
and  even  now  frequent  undercurrents  of  resent- 
ment are  aroused  between  them  because  of  the 
alleged  encroachments  of  one  class  upon  the 
domain  of  the  other.     In  Paris,  where  the  seventv 


278  THE  STOCK  EXCHANGE  FROM  WITHIN 

Agents  de  Change  enjoy  an  absolute  monopoly  by 
government  authority,  there  is  very  decided  op- 
position by  the  less  fortunate  members  of  the 
fraternity,  and  there  are  many  who  predict  that 
the  friction  and  dissatisfaction  which  monopolies 
arouse  in  this  day  and  age  will  sooner  or  later 
bring  about  a  reformation  of  the  French  system.     • 

Flere  there  are  no  such  distinctions,  and  no 
friction.  A  member  may  be  any  one  of  several 
different  kinds  of  brokers,  or  he  may  be  all  of 
them  at  once,  if  his  arms  and  legs  will  stand  the 
strain,  and  if  his  financial  resources  will  enable 
him  to  meet  the  losses  arising  from  mistakes. 
These  mistakes  are  a  sorry  part  of  the  business, 
and  they  are  bound  to  occur  every  now  and  then, 
no  matter  how  careful  a  man  may  be,  but  I  have 
observed  that  they  come  about  most  frequently 
in  the  case  of  men  who  try  to  do  too  much. 

A  man  may,  if  he  chooses,  become  a  partner 
in  a  commission  house,  and  confine  his  time  to 
the  execution  of  orders  for  his  firm's  customers. 
For  these  services  his  firm  receives  and  is  com- 
pelled to  collect,  by  the  rules,  a  commission  of 
one  eighth  of  i  per  cent. —  that  is  to  say,  $12.50 
per  hundred  shares.  Or  he  may  be  a  "specialist," 
and  establish  his  headquarters  at  some  one  spot 
in  the  room,  and  do  nothing  but  execute  orders 
entrusted  to  him  by  his  fellow-members  in  the  one 


THE  DAY  ON  'CHANGE  279 

stock  or  group  of  stocks  situated  at  that  particular 
spot.  For  his  services  In  these  transactions  he  re- 
ceives a  commission  of  two  dollars  per  hundred 
shares,  to  which  is  added  ^1.13  if  he  Is  required  to 
"clear"  the  trade — 'that  Is,  to  receive  or  de- 
liver the  stock.  The  latter  is  called  "three-and- 
a-shilling business,"  or  "clearance  business." 

The  vocation  of  the  specialist  is  one  that  causes 
frequent  comment  and  ill-merited  abuse.  It  has 
been  charged  that  he  sometimes  exercises  arbitrary 
power  In  executing  his  orders,  and  complaint  is 
heard  that  the  price  at  which  he  deals  Is  not 
always  a  fair  price.  My  observation  Is  that 
four  times  out  of  five  the  fault  lies,  not  with  the 
specialist,  but  with  the  broker  who  gives  him 
the  order.  The  latter  has  been  trying  to  do  too 
much,  he  has  held  the  order  In  his  hand  whilst 
engaged  elsewhere  in  the  hope  of  saving  the 
commission  for  himself,  and  then,  when  he  has 
"missed  his  market,"  turns  the  order  over  to 
the  specialist  and  shifts  the  responsibility  to  his 
shoulders.  This  Is  scarcely  fair,  and  It  simply 
should  not  happen.  The  customer  protests  at 
the  delay  and  at  the  price;  he  Is  told  the  specialist 
is  responsible,  and  straightway  another  voice 
joins  the  chorus  that  holds  the  specialist  In 
abhorrence. 

Like  the  chairman  of  the  House  Committee  of 


28o  THE  STOCK  EXCHANGE  FROM  WITHIN 

a  club,  the  specialist  is  made  to  bear  everybody's 
burdens;  he  is  the  target  for  all  the  criticism  that 
any  one  chooses  to  hurl  at  him.  And  yet  he  is  one 
of  the  most  useful  and  indispensable  features  of 
the  Exchange  machinery.  Without  him  there 
would  be  no  market  whatever  in  very  many 
securities;  like  the  London  jobber,  he  is  constantly 
on  the  spot,  ready  to  take  chances  by  creating 
at  his  personal  risk  a  market  where  none  may 
have  existed.  If  it  be  urged  that  the  specialist 
should  not  speculate,  but  should  confine  himself 
solely  to  executing  the  orders  on  his  books,  it  may 
be  answered  that  in  such  a  case  he  would  often 
be  useless,  for  in  many  instances  the  orders  on  his 
books  are  insufficient  In  volume  to  establish  a  close 
market  or  anything  approaching  it.  By  reason 
of  his  speculations  a  market  Is  created;  without 
them  it  may  not  exist.  He  speculates,  therefore, 
for  the  same  reason  that  jobbers  In  the  London 
market  speculate,  and  dealers  in  wheat,  cotton, 
and  wool.  Like  them,  he  must  have  goods  on 
hand  to  supply  the  demand,  and  in  the  purchase 
of  these  goods  (securities  he  speculates,  legiti- 
mately, on  the  hope  or  belief  that  buyers  will 
appear. 

If  the  new  member  chooses,  he  may  become 
what  Is  known  as  a  "two-dollar  broker,"  with 
a  roving  commission,  executing  orders  for  members. 


THE  DAY  ON  'CHANGE  281 

in  any  part  of  the  room  at  $z  per  hundred 
shares.  The  "two-dollar  man,"  as  he  is  termed, 
is  a  hard  worker  above  his  fellows.  He  labors 
for  a  minimum  wage;  he  must  work  every  day  or 
forego  his  revenues,  for  he  cannot  delegate  his 
orders  to  any  one  else  and  receive  a  commission 
for  these  vicarious  services.  He  takes  big  risks, 
because  he  has  many  orders  from  many  different 
houses;  the  least  inattention  means  loss.  I  have 
known  one  of  these  two-dollar  men  to  lose  ^10,000 
on  a  mistake  on  a  500-share  order  from  which  his 
commission  was  but  ^10.  He  is  supposed  to  be 
a  mine  of  information  concerning  floor  gossip; 
his  value  to  the  houses  that  employ  him  lies  quite 
as  much  in  his  ability  as  a  newsgatherer  as  in  his 
skill  as  a  broker.  He  is  on  the  jump  every 
minute.  The  one  redeeming  feature  of  his 
business  is  that  he  has  no  office  responsibilities, 
and  none  of  the  burdensome  —  and  sometimes 
painful  —  duties  that  attend  the  stockbroker's  re- 
lations to  his  clients. 

There  are  perhaps  fifty  "  odd-lot  "  brokers  on 
the  floor,  and  a  member  may,  if  he  pleases,  take 
up  this  branch  of  the  business.  It  has  to  do  with 
the  buying  and  selling  of  fractional  lots  of 
securities,  on  which  no  commission  is  charged 
because  the  peculiar  nature  of  this  business  enables 
the  broker  to  trade  against  his  commitments   as 


282  THE  STOCK  EXCHANGE  FROM  WITHIN 

they  arise,  and  thus  obtain  compensation  for  his 
services  in  the  resultant  profit.  In  a  small  way 
the  odd-lot  broker,  like  the  specialist,  resembles 
the  London  jobber.  One  of  the  houses  that 
confines  its  operations  to  this  "odd-lot"  business 
has  nine  partners,  seven  of  whom  are  members 
of  the  Exchange;  another  has  seven  partners  with 
six  board-members.  The  fact  that  two  such  houses 
should  have  a  million  dollars  invested  in  member- 
ships, to  say  nothing  of  the  large  sums  employed 
as  capital,  speaks  eloquently  for  the  volume  of 
business  they  are  called  upon  to  handle. 

This  business,  which  includes  fractional  lots  of 
securities  from  one  to  a  hundred  shares,  is  one  of 
the  most  important  on  the  floor,  since  it  represents, 
very  largely,  the  purchases  and  sales  of  an  army  of 
small  investors  all  over  the  world.  To  such 
customers,  very  properly,  the  Stock  Exchange 
gives  the  best  it  has,  safeguarding  their  interests 
with  quite  as  much  care  as  it  bestows  on  the 
greatest  of  market  operators.  The  handling  of  all 
the  odd-lot  orders  that  accumulate  in  a  busy  day, 
the  skill  required  in  the  office-machinery,  the 
vigilance  of  the  floor  expert,  and  the  foresight 
necessary  to  conduct  the  trading  operations  of 
the  firm  make  this  a  most  fascinating  business. 

Another  field  to  which  a  member  may  turn  is 
that  which  has  to  do  with  transactions  in  bonds. 


THE  DAY  ON  'CHANGE  285 

The  "bond-crowd,"  as  It  Is  called,  makes  Its 
headquarters  on  a  platform  under  the  east  gallery. 
There  are  about  fifty  of  these  "bond-men,"  and 
the  compensation  paid  them  for  their  service  Is 
the  same  as  that  paid  on  stocks,  ten  thousand 
dollars  In  bonds  being  reckoned  equivalent  tO' 
100  shares.  As  there  are  twice  as  many  bonds 
as  stocks  listed  on  the  Exchange,  one  would 
think  a  larger  number  of  brokers  than  this 
little  coterie  would  be  required  to  handle  the 
transactions,  but,  despite  this  disparity  In  the 
relative  size  of  the  lists,  it  so  happens  that  very 
many  of  the  listed  bond  Issues  are  rarely  dealt  in, 
and  hence  there  is  no  surplus  business.  Moreover,, 
brokers  from  all  parts  of  the  room  are  constantly 
executing  their  own  bond  orders  without  having 
recourse  to  the  assistance  of  brokers  who  make 
this  department  a  specialty. 

Still  another  opportunity  presents  itself  In  the 
business  of  arbitraglng.  The  arbitrageurs  stick 
closely  to  the  rail  along  the  south  wall,  where 
there  are  pneumatic  tubes  connecting  with  the 
cable  offices  downstairs.  Their  business  is  one 
that  calls  for  the  utmost  speed,  since  it  involves 
taking  advantage  of  fractional  differences  that 
arise  from  time  to  time  in  the  prices  of  stocks  that 
are  listed  on  foreign  Bourses  as  well  as  on  the 
New    York    Stock    Exchange.      Thus    Canadian 


284  THE  STOCK  EXCHANGE  FROM  WITHIN 

Pacific  may  sell  at  270  in  London  and  at  the  same 
time  at  269I  in  New  York,  and  as  an  excellent 
cable  service  keeps  pace  with  these  fractional 
differences,  the  arbitrageur  may  buy  in  New 
York  and  sell  in  London  and  receive  a  confirma- 
tion, all  within  three  minutes.* 

Because  of  its  complexity  and  its  risks,  arbi- 
traging  is  not  a  business  that  appeals  to  beginners 
on  the  floor.  One  must  have  reliable  colleagues 
on  the  foreign  Exchanges  who  are  constantly 
watchful  and  alert,  and  who  are  moreover 
possessed  of  sufficient  capital  to  finance  large 
transactions.  In  addition,  there  are  labyrinthine 
difiiculties  to  surmount  in  the  way  of  commissions, 
interest  charges,  insurance  of  securities  in  transit, 
fluctuations  in  the  money  markets  abroad  and  at 
home,  cable  tolls,  letters  of  confirmation,  rates  of 
foreign  exchange,  settlement  days,  contangoes, 
and  many  other  matters.  Unless  a  man  has  had 
a  long  experience  in  the  difficult  art  of  arbitraging, 
he  had  better  shun  it  or  prepare  for  trouble. 

Finally,  in  determining  what  branch  of  thd 
Stock  Exchange  business  he  will  undertake,  a 
member  must  consider  that  numerous  and  shifty 

*  The  celerity  and  accuracy  of  the  cable  service  between  New  York  and 
foreign  centres,  as  perfected  in  arbitraging,  has  no  parallel  elsewhere. 
Twenty  minutes  are  often  required  to  complete  a  cable  transaction  between 
the  London  Stock.  Exchange  and  the  Paris  Bourse,  and  so  it  frequently 
happens,  where  speed  is  required,  that  messages  between  those  two  centres 
-are  cabled  by  way  of  New  York. 


THE  DAY  ON  'CHANGE  2S5 

contingent  known  as  "floor  traders."  These 
gentlemen  .afford  an  interesting  study.  They 
do  not  accept  orders;  each  man  is  in  business  for 
himself.  They  entertain  no  illusions,  and  they 
recognize  no  alliances  with  each  other.  Each  one 
follows  his  own  inclinations,  and  does  not  permit 
himself  to  be  moved  by  tips,  or  rumors,  or  gossip, 
or  sentiment.  He  scoffs  brazenly  at  all  forms  of 
"inside  information."  His  power  of  observation 
is  keen,  and  his  habit  of  analysis  and  deduction 
is  wonderfully  developed.  In  the  surging  crowd 
around  an  active  stock  he  sees  things  with  micro- 
scopic eye,  and  acts  with  surprising  promptness; 
once  his  conclusions  are  reached,  speed  and 
agility  are  relied  upon  to  do  the  rest.  Age  can- 
not wither,  nor  custom  stale,  his  infinite  variety. 
He  is  a  bull  one  minute,  and  a  bear  the  next. 
He  is  intent,  resourceful,  suspicious,  vigilant,  and 
ubiquitous.  He  asks  no  quarter,  and  gives  none. 
Now  he  is  sphinx-like,  deaf,  inscrutable  and 
impenetrable;  now  exploding  with  the  frenzy 
of  battle.  You  may  stand  and  chat  with  him, 
and  he  may  seem  to  listen  to  you.  In  reality  he 
does  not  hear  you  at  all.  His  roving  eye  is 
elsewhere,  his  mind  Is  intent  on  other  things. 
In  the  middle  of  a  sentence  he  may  leave  you 
abruptly  and  go  tearing  from  crowd  to  crowd  like 
a  thing  possessed,  the  incarnation  of  energy. 


286  THE  STOCK  EXCHANGE  FROM  WITHIN 

Visitors  in  the  gallery  who  look  down  upon  the 
scene  on  the  floor  In  active  markets,  when  all 
the  Stock  Exchange  elements  just  described  are 
striving  at  their  utmost,  come  away  in  wonder- 
ment. The  scene  is  one  they  do  not  understand. 
Such  tumult  is  foreign  to  anything  in  their  experi- 
ence, and  in  their  failure  to  recognize  the  economic 
forces  at  work  In  the  animated  panorama  before 
their  eyes  they  are  prone  to  form  superficial  and 
erroneous  opinions.  The  disorderly  nature  of  the 
work  seems  to  impress  the  visitor  forcibly,  yet 
the  Stock  Exchange  is  perfectly  orderly;  trans- 
actions involving  millions  come  and  go  without 
the  slightest  friction.  Nothing  could  work  more 
smoothly. 

It  does  not  occur  to  the  uninstructed  spectator 
that  mighty  forces  are  here  at  work  in  establishing 
values;  that  the  object  of  the  Stock  Exchange  Is 
to  safeguard  investors;  that  it  is  the  one  unob- 
structed channel  through  which  capital  may  flow 
from  sources  where  it  is  least  needed  Into  those 
where  it  may  be  most  beneficially  employed.  The 
casual  onlooker  often  gives  no  thought  to  the 
high  standard  of  commercial  honor  that  is  main- 
tained here;  he  does  not  realize  that  his  own 
affairs,  whatever  they  may  be,  would  face  a 
serious  situation  were  this  very  Important  part  of 
the    modern    mechanism    of    business    to    suffer 


THE  DAY  ON  'CHANGE  287 

interruption.  And  so  it  sometimes  happens,  in 
his  hazy  and  nebulous  impressions  of  the  Stock 
Exchange  as  gathered  from  the  visitors'  gallery, 
that  this  man's  mind  is  fertile  ground  for  the 
seed  which  may  be  sowed  there  by  every  genteel 
humbug,  demagogue,  or  quack  whom  he  chances 
to  meet. 

It  may  be  admitted  freely  that  the  facilities 
aflforded  by  Stock  Exchanges,  like  all  other  great 
public  utilities,  are  sometimes  foolishly  or  dis- 
honestly abused,  but  by  no  stretch  of  the  imagina- 
tion can  such  abuses  attain  to  the  mischief  done  by 
those  who  would  deceive  people  into  the  belief 
that  the  Stock  Exchange,  because  it  deals  with 
large  affairs  in  a  large  way,  has  some  improper 
quality  about  it.  Many  minds,  many  hands,  and 
many  hours  of  patient  labor  have  been  bestowed 
on  the  making  of  the  chronometer  which  is  a  vital 
part  of  a  great  ship;  yet  a  child  may  "put  it  out 
of  business, "  and  destroy  the  ship's  company. 

That  these  observations  apply  to  the  New 
York  Stock  Exchange  need  not  be  elaborated 
when  we  consider  that  one  third  of  our  na- 
tion's wealth  is  represented  by  its  securities; 
that  there  are  two  million  owners  of  them; 
and  that,  through  the  widespread  publicity  of 
Stock  Exchange  quotations  the  world  over,  all 
these    owners    are    given    gratis    the    epitomized 


288  THE  STOCK  EXCHANGE  FROM  WITHIN 

judgment  of  experts  as  to  the  value  of  those 
securities  each  day  and  their  prospective  value 
in  the  future.* 

The  Stock  Exchange  is  open  for  business  from 
lo  A.M.,  to  3  P.M.,  and  on  Saturdays  from  lo  to 
12  noon.  The  broker  reaches  his  office  between 
9  and  9:30  a.m.,  looks  over  his  correspondence, 
makes  a  mental  note  of  the  general  status  of  the 
firm's  affairs,  glances  at  the  morning's  news  that 
is  rapidly  reeling  off  the  ticker,  reads  the  prices 
cabled  over  from  the  London  Stock  Exchange 
which  has  been  in  session  four  hours,  and  thus  in 
a  general  way  acquaints  himself  with  what  may 
be  expected  at  the  opening  of  the  New  York 
market.  The  two-dollar  broker  and  the  special- 
ist do  not  concern  themselves  greatly  with  such 
matters,  and  frequently  they  go  directly  to  the 
floor  without  stopping  at  their  offices. 

By  9:45  A.M.  the  Board  is  beginning  to  present 
a  scene  of  animation.  Of  the  iioo  members 
not  more  than  600  are  in  attendance,  and  often 
not  more  than  400;  indeed,  there  are  members 
who  have  never  once  entered  the  room.  But 
the  attendance  is  increased  by  the  presence  of 
some  230  pages  in  uniform,  wearing  five-year 
service  stripes,  of  which  the  sleeve  of  the  superin- 


*  Consult  "The  World's  Wealth  in  Negotiable  Securities,"  by  Charles 
A.  Conant,  Atlantic  Monthly,  (July,  1908). 


THE  DAY  ON  'CHANGE  289 

tendent  is  adorned  with  eight;  30  telegraph  opera- 
tors, whose  business  it  is  to  hurry  from  place  to 
place  gathering  quotations  as  they  occur,  and 
sending  them  out  over  the  ticker,  and  by  550 
telephone  clerks  who  occupy  the  long  booths  on 
the  west  wall,  where  private  lines  connect  mem- 
bers with  their  offices. 

These  clerks  are  not  permitted  to  go  on 
the  floor.  Their  employers,  who  rent  the 
telephones  from  the  Exchange,  pay  ^50  annu- 
ally to  the  institution  as  a  fee  for  each  clerk. 
As  their  duties  are  extremely  important,  involving 
the  transmission  by  'phone  of  orders  and  reports 
that  often  run  into  millions,  it  will  be  seen  that 
this  small  army  of  private  line  operators  is  of 
necessity  highly  trained.  An  instant's  relaxation 
or  inattention,  or  a  failure  to  transmit  promptly 
and  correctly  the  verbal  messages  entrusted  to 
them,  may  conceivably  lead  to  confusion  and 
losses  of  great  importance. 

At  each  of  the  sixteen  posts  in  the  room,  from 
twenty  to  forty  stocks  are  situated,  and  another 
group  covers  the  north  wall.  Once  a  position  is 
assigned  to  any  security  by  the  committee  in 
charge,  it  is  seldom  moved  elsewhere,  and  thus, 
although  there  are  nearly  six  hundred  different 
issues  of  securities,  the  broker  soon  learns  the 
location  of  each  one  and  turns  automatically  in 


290  THE  STOCK  EXCHANGE  FROM  WITHIN 

that  direction  when  an  order  reaches  him.  At 
each  of  the  posts,  and  along  the  north  wall,  the 
specialists  in  these  various  groups  of  stocks  are 
at  work  before  the  opening  of  the  market,  entering 
the  day's  orders  in  their  books,  some  with  the 
rapid  energy  that  betokens  an  active  opening, 
others  with  an  indifference  that  spells  dulness  in 
their  particular  line. 

At  Post  4,  in  the  northeast  corner,  there  is 
also  an  ante-market  gathering,  for  this  is  the  spot 
where  stocks  and  money  are  borrowed  and  loaned. 
This  "loan  crowd,"  as  it  is  called,  was  formerly 
the  gathering  to  which  one  turned  to  gauge  the 
market  position  of  the  bear  party,  since  the  bor- 
rowing of  stocks  by  "shorts,"  as  done  here, 
furnished  an  index  of  the  strength  or  weakness 
of  that  interesting  element.  But  of  late  it  has 
lost  its  ancient  prestige  as  a  guide  in  such  matters, 
because  in  order  to  hide  the  information  sought, 
borrowing  of  stocks  on  a  large  scale  is  now  done 
privately.  This  "crowd"  has  been  the  scene  of 
some  tremendous  excitement,  as  in  the  Northern 
Pacific  corner  of  May  9,  1901,  when  the  price 
soared  to  $1000  per  share  and  the  shorts  were 
trapped,  and  on  that  day  in  October,  1907,  when 
money,  after  loaning  at  125  per  cent.,  was  not 
to  be  had,  for  a  time,  at  any  price,  although 
brokers  with  the  best  collateral  would  have  paid 


THE  DAY  ON  'CHANGE  291 

200  or  300  per  cent,  for  accommodation,  and  ruin 
stared  every  one  in  the  face. 

As  the  hour  of  ten  draws  near,  activities  increase. 
On  the  south  wall  the  arbitrageurs  are  busy  de- 
ciphering their  code  messages  and  distributing 
orders,  many  hundred  telephone  bells  are  ringing 
in  the  long  booths  where  clerks  are  hastily  writing 
their  messages;  crowds  of  visitors  gather  in  the 
gallery,  while  beneath  it  the  bond-brokers  prepare 
for  their  labors;  indicator  boards  on  the  north  and 
south  walls,  like  great  kaleidoscopes,  display  and 
hide  their  number  with  the  same  electric  sud- 
denness that  seems  to  characterize  everything 
and  everybody  —  then  bang!  the  gong  rings,  the 
chairman's  gavel  falls,  and  another  day  begins. 
Yesterday  is  embalmed  with  the  Pharaohs;  they 
never  speak  here  of  what  has  happened,  but  only 
of  what  will  happen  —  and  this  is  a  new  day. 

Naturally,  certain  securities  are  more  active 
than  others,  and  here  there  are  the  largest  crowds. 
As  the  limits  surrounding  the  trading-posts  are 
but  vaguely  defined,  one  crowd  will  sometimes 
get  mixed  up  with  another,  whereupon  confusion 
results,  and  good-natured  if  earnest  appeals  are 
heard  to  "get  out,"  and  "get  over."  Into  one 
of  these  struggling  masses  a  broker  with  an  order 
or  a  trader  with  an  inspiration  literally  hurls 
himself;  each  sound  in  the  jargon  of  voices,  which 


292  THE  STOCK  EXCHANGE  FROM  WITHIN 

means  only  Bedlam  and  Babel  to  the  visitor,  is 
to  him  perfectly  understood.  He  may  be  pushed 
this  way  and  that,  or  tossed  aside,  or  hidden 
altogether  by  bigger  men  who  surround  him,  yet 
he  has  no  difficulty  in  determining  the  price  and 
in  doing  what  he  came  there  to  do;  all  this  with 
surprising  celerity  and  accuracy.  The  business 
done,  he  hastens  to  his  telephone,  makes  his 
report,  and  is  ready  for  the  next  order.  The 
manner  in  which  some  of  these  transactions  take 
place  between  brokers  has  long  been  a  subject  of 
praise.  A  word,  or  a  nod,  or  an  upraised  finger, 
or  a  tap  on  the  arm,  and  hundreds  of  thousands 
of  dollars  change  hands  without  a  scrap  of  writing 
or  a  witness.     A  magazine  writer  thus  describes  it; 

One  pastime  of  the  American  public  is  the  manly  sport  of 
throwing  mud.  A  shovelful  of  scandalous  mud  —  a  clean 
white  target,  and  many  a  reputable  and  disreputable  citizen 
is  having  the  time  of  his  life.  We  bespatter  our  philanthro- 
pists, our  statesmen,  merchants,  lawyers,  and  divines.  We 
vilify  our  art,  our  architecture  (I  take  a  hand  in  that  some- 
times myself),  our  literature,  or  anything  else  about  which 
some  one  has  spoken  a  good  word. 

One  of  the  time-honored  institutions  of  our  land  —  one 
which  has  never  ceased  to  be  the  centre  of  abuse  —  is  the 
New  York  Stock  Exchange.  Here  conspiracies  are  organ- 
ized for  robbing  the  poor  and  grinding  the  rich;  so  despicable 
and  damnable  that  Society  is  appalled.  Here  plots  are 
hatched  which  will  eventually  destroy  the  nation,  and  here 
the  Gold  Barons  defraud  the  innocent  and  the  unwary,  by 


THE  DAY  ON  'CHANGE  293 

stock  issues  based  solely  on  hot  air  and  diluted  water.  Here 
Senators  are  made,  Congressmen  debauched,  and  judges 
instructed  —  even  plans  consummated  for  the  seduction  and 
capture  of  the  Supreme  Court.  All  this  is  true  —  absolutely- 
true —  you  have  only  to  read  the  daily  papers  to  be  con- 
vinced of  it. 

There  is  one  thing,  however,  which  you  will  not  find  in 
the  daily  papers.  It  is  not  sufficiently  interesting  to  the 
average  reader  who  needs  his  hourly  thrill;  and  this  one  thing 
is  the  unimpeachable,  clear,  limpid  honesty  of  its  members. 

When  you  buy  a  house  even  if  both  parties  sign,  the  agree- 
ment is  worthless  unless  you  put  up  one  American  dollar 
and  get  the  other  fellow's  receipt  for  it  in  writing.  If  you 
buy  a  horse  or  a  cow,  or  anything  else  of  value,  the  same 
precaution  is  necessary.  So  too  if  you  sign  a  will.  Your 
own  word  is  not  good  enough.  You  must  get  two  others  to 
sign  with  you  before  the  Surrogate  is  satisfied. 

None  of  this  in  the  Stock  Exchange.  A  wink,  or  two 
fingers  held  up,  Is  enough.  Often  in  the  thick  of  the  fight 
when  the  floor  of  the  Exchange  is  a  howling  mob,  when 
frenzied  brokers  shout  themselves  hoarse  and  stocks  are 
going  up  and  down  by  leaps  and  bounds,  and  ruin  or  fortune 
is  measured  by  minutes,  the  lifting  of  a  man's  hand  over 
the  heads  of  the  crowd  is  all  that  binds  the  bargain. 

What  may  have  happened  in  the  half  hour's  interim,  before 
the  buyer  and  seller  can  compare  and  confirm,  makes  no 
difference  in  the  bargain.  It  may  be  ruin  —  possibly  is  — 
to  one  or  the  other,  but  there  is  no  crawling  —  no  equivoca- 
tion—  no  saying  you  didn't  understand,  or  "I  was  waving 
to  the  man  behind  you."  Just  this  plain,  straight,  unvar- 
nished truth,  "Yes,  that's  right  —  send  it  in." 

If  it  be  ruin,  the  loser  empties  out  on  the  table  everything 
he  has  in  his  pockets;  everything  he  has  in  his  bank;  all  his 
houses,  lots,  and  securities  —  often  his  wife's  jewels,  and 
pays  30,  40,  or  70  per  cent.,  as  the  case  may  be. 


294  THE  STOCK  EXCHANGE  FROM  WITHIN 

What  he  has  saved  from  the  wreck  are  his  integrity  and 
his  good  name.  In  this  salvage  lies  the  respect  with  which 
his  fellows  hold  him. 

Every  hand  is  now  held  out.  He  has  stood  the  test,  he 
has  made  good.  Let  him  have  swerved  by  a  hair's  breadth 
and  his  career  in  the  Street  would  have  been  ended.* 

Of  course  mistakes  and  misunderstandings  do 
sometimes  occur,  and  these  are  the  banes  of  the 
broker's  life.  He  will  lose  ^500  with  equanimity 
on  a  personal  venture,  but  he  will  howl  in  distress 
over  a  loss  of  ^25  on  a  mistake,  and  apply  to  him- 
self a  lurid  mosaic  of  epithets  because  of  it.  The 
one  merely  shows  bad  judgment  and  is  one  of  the 
little  amenities;  the  other  he  feels  Is  stupidity. 
At  such  times  the  stockbroker  adopts  Talleyrand's 
bold  hyperbole  when  he  heard  of  the  death  of  the 
Due  d'  Enghien,  "It  is  worse  than  a  crime;  it  is 
a  blunder." 

When  a  "mix-up"  occurs  in  a  crowd,  as  when 
four  or  five  men  make  claim  to  having  supplied 
a  bid  simultaneously,  everybody  produces  a  coin 
and  "matches"  on  the  instant.  It  is  a  case  of 
"odd  man  wins,"  and  no  time  to  lose.  The 
market  may  be  active  and  differences  of  seconds 
may  spell  losses  of  thousands.  In  less  time  than 
it  takes  to  tell  it,  everything  is  adjusted  and 
forgotten.     But     sometimes     a     mistake     occurs 


*  Hopkinson  Smith,  in  the  World's  Work  (August,  1912). 


THE  DAY  ON  'CHANGE  295 

which  is  not  discovered  by  either  party  until  after 
the  market  has  closed.  A  man  may  think  he  sold 
500  shares,  for  example,  whereas  the  buyer  has  only 
400  on  his  book.  In  a  case  of  this  sort,  the  dis- 
crepancy is  covered  "at  the  market"  next  morning 
and  the  loss  or  profit  is  divided.  Differences 
between  members  are  seldom  irreconcilable,  and 
when  they  assume  serious  proportions  any  third 
man  will  act  as  arbiter  and  .speedily  settle  them. 
It  is  a  significant  fact  that  the  Committee  of 
Governors  selected  to  arbitrate  disputes  is  rarely 
called  upon.  Rarely,  too,  is  there  acrimony  or 
hard  feeling.  The  use  of  epithets  is  forbidden; 
to  call  a  man  a  liar  means  prompt  suspension. 
And  so  they  live  on  raw  nerves,  with  incidents 
occurring  daily  that  add  to  the  strain,  yet  ever 
with  good-humored  acquiescence  toward  what- 
ever fortune  deals  out  to  them,  and  with  generous 
camaraderie  one  to  another. 

As  the  day  advances  on  'Change,  new:s  and 
gossip  and  rumors  of  all  kinds  pour  in,  and  to 
these  the  active  broker  must  devote  a  large  part 
of  his  time.  It  is  astonishing  to  what  extent  the 
public,  or  that  part  of  it  that  lingers  in  brokerage 
offices,  calls  for  news  from  the  floor.  The 
demand  is  insatiable.  "What  do  you  see  over 
there.?"  "Who  is  buying  Steel.?"  "Who  is 
selling  Union.?"     "What's  the  news  in  Copper.?" 


296  THE  STOCK  EXCHANGE  FROM  WITHIN 

"What  do  you  think  of  the  market?"  These  are 
the  messages  that  come  over  the  wires  all  day 
long,  not  merely  from  the  New  York  offices,  but 
from  Montreal,  Boston,  Chicago,  St.  Louis,  and 
many  other  points.  And  no  matter  how  busy 
the  floor  broker  may  be,  time  must  be  found, 
somehow,  to  reply  to  every  question  as  best  he 
may,  for  at  the  other  end  of  the  line  there  is  a 
customer  waiting  to  hear  from  him. 

Just  why  this  customer  yearns  for  news  from 
the  floor  has  always  been  a  mystery  to  me.  What 
does  he  expect  to  learn  .^  What  value  attaches 
to  a  list  of  names  of  brokers  who  buy  or  sell  Steel, 
when  everybody  knows  that  really  important 
principals  in  these  matters  invariably  hide  their 
hands  .^  All  the  significant  news  of  the  day  is 
printed  on  the  news  tickers  and  reaches  the 
customer's  eye  before  the  broker  or  the  floor 
knows  anything  about  it,  yet  never  an  hour 
passes  but  he  is  importuned  to  "say  something'* 
about  what  is  happening  on  'Change,  although 
half  the  time  nothing  whatever  is  happening. 
The  climax  of  this  sort  of  thing  is  reached  when 
the  floor  man  is  asked  to  predict  the  future  course 
of  the  market,  a  request  that  reaches  him  a  dozen 
times  a  day.  Now,  in  the  name  of  common  sense, 
what  does  he  know  about  whether  the  market  is 
going   up    or    down?     How    can    a    man    who   is 


THE  DAY  ON  'CHANGE  297 

swimming  with  the  current  tell  how  fast  he  is 
going?  If  he  were  a  seer  who  could  foretell  such 
things  he  would  have  all  the  money  in  Wall 
Street,  in  which  case  he  wouldn't  remain  a  broker 
very  long. 

Just  watch  him;  he  is  as  busy  as  a  man  can  be; 
his  hands  are  full  of  orders,  his  head  is  occupied 
with  many  anxieties,  his  eye  is  on  the  indicator 
board,  or  scanning  the  room;  arms  and  legs  are 
working  as  fast  as  nature  will  permit;  he  must 
concentrate  at  all  times.  His  ears  ring  with  the 
strife  of  the  room;  all  sorts  of  rumors,  many  of 
them  ridiculous,  are  hastily  whispered  to  him; 
"boos"  and  groans  from  the  bears,  shrieks  and 
yells  from  the  bulls  —  this  is  the  sort  of  thing  he 
hears  all  the  day  long.  How  can  he  form  an 
opinion  when  thus  distracted?  He  stands  too 
close  to  the  picture;  he  lacks  perspective.  What 
such  a  man  thinks  of  the  market  isn't  worth  any- 
thing; indeed,  he  does  not  "think"  at  all  except 
about  executing  his  orders,  and  heaven  knows 
that  is  enough  to  engross  him. 

Answering  all  the  questions  that  come  to  him 
over  the  wires  is  the  hardest  task,  and  the  most 
distasteful  thing  the  floor  man  is  called  on  to  do. 
He  knows  that  he  doesn't  know  anything;  from 
his  point  of  view  no  information  is  better  than 
misinformation.     He  feels  with  Josh  Billings,  "  It's 


298  THE  STOCK  EXCHANGE  FROM  WITHIN 

a  mitey  site  better  not  2  no  so  mutch  than  2 
no  so  mutch  that  ain't  so,"  but  nevertheless  he 
must  continue  to  express  views  and  theories  and 
opinions,  and  predictions,  whether  he  Hkes  it  or 
not.  Some  of  his  oracular  utterances  are  illumi- 
nating. "Market  is  going  down,"  he  replies, 
"because  there  are  more  sellers  than  buyers." 
Inexorable  logic. 

There  was  old  Y ,  who  used  to  talk  to  his 

customers  sitting  near  his  office  window,  which 
faced  Battery  Park.  He  was  a  shifty  professor 
of  finance  who  never  was  known  to  hold  the  same 
opinion  of  the  stock  market  two  days  running. 
*'This  market,"  he  said  one  day,  "is  going  away 
up,  crops  are  good,  money  is  easy,  railroads  are 
rolling  in  wealth,  and — ^  look  over  there"  — 
pointing  to  a  line  of  immigrants  walking  through 
the  park  from  the  landing  place  —  "the  brawn 
and  sinew  of  old  Europe  coming  over  here  to 
develop  our  resources. "  The  very  next  day  the 
market  had  what  is  called  a  "healthy  reaction." 
Quite   unmindful   of  his   consoling  prophecies  of 

yesterday,  old   Y looked  at  the  tape  and 

said,  "This  market  is  going  away  down.  Crops  are 
poor,  money  is  tight,  railroads  are  in  a  bad  way, 
and  —  look  over  there"  —  pointing  to  another 
procession  of  immigrants  —  "the  scum  of  Europe 
coming  over  here  to  rob  our  American  laborers." 


THE  DAY  ON  'CHANGE  299 

If  that  portion  of  the  pubHc  which  buys  and 
sells  stocks  often  has  its  little  joke  at  the  expense 
of  brokers,  so  also  brokers  in  their  turn  frequently 
have  cause  to  laugh  at  their  clients.  "Cheer  up," 
was  the  message  sent  over  the  wire  by  a  hopeful 
broker  to  a  despondent  client;  "cheer  up,  the 
market  can  only  go  two  ways."  "Yes,"  was  the 
reply,  "but  it  has  so  damn  many  ways  of  going 
those  two  ways."  During  the  rubber  boom  of 
1910  on  the  London  Stock  Exchange,  a  broker 
wired  to  a  client  in  Ireland,  "Rise  in  bank  rate 
considered  likely, "  to  which  he  received  a  prompt 
reply,  "Buy  me  five  hundred."  A  telegram  came 
over  a  private  line  one  day  last  summer  from  a 
customer  in  Montreal.  It  was  a  deadly  dull 
period,  when,  owing  to  the  indifference  of  the 
public,  stockbrokers  were  not  making  expenses. 
"What  are  you  chaps  doing  over  there .^"  said 
the  telegram.  "Why  don't  you  start  some- 
thing?" to  which  the  floor  member  replied, 
"Read  St.  Luke  7:32."*  This  must  have  been 
the  same  member  who,  when  customers  were  few 
and  far  between,  hastily  'phoned  his  office  partner, 
"Put  all  our  customers  into  copper,"  to  which  his 
partner  replied  with  grim  resignation,  "He  won't 
be  down  to-day." 

*  "They  are  like  unto  children  sitting  in  the  market-place  and  calling 
one  to  another,  and  saying,  'We  have  piped  unto  you,  and  ye  have  not 
danced;   we  have  mourned  to  you,  and  ye  have  not  wept.'" 


300  THE  STOCK  EXCHANGE  FROM  WITHIN 

When  the  gong  rings  at  three,  the  day's  work 
on  'Change  is  at  an  end,  and  the  shouting  and  the 
tumult  dies.  It  is  then  8  p.  m,  in  London,  and 
there  in  the  Street  hard  by  the  Exchange,  even 
at  that  ungodly  hour,  brokers  and  jobbers^  in  the 
"Yankee"  market  are  still  at  work  in  all  kinds  of 
weather.  "The  American  market,"  says  the  (Lon- 
don) Quarterly  Review,  "continues,  as  a  rule,  to 
deal  up  to  8  p.  m.  (5  p.  m.  on  Saturdays),  when  the 
cable  offices  on  this  side  close  down.  Up  to  that 
time  wires  are  coming  in  continually  from  New 
York  with  orders  and  prices;  and  a  man  would  be 
ill  advised  to  undertake  jobbing  in  the  American 
market  unless  he  has  a  splendid  constitution  and 
lives  within  easy  reach  of  town.  Every  year  the 
Yankee  market  levies  a  death-tax  upon  its  mem- 
bers through  the  medium  of  pneumonia  and  other 
complaints  brought  on  by  long  exposure  in  the 
Street  after  official  hours;  and  very  little  is  done 
to  provide  these  late  dealers  with  adequate  accom- 
modations or  shelter.  "* 

Before  leaving  the  Board  after  the  official  close, 
the  broker  will  stop  for  a  moment  at  the  loan 
crowd  to  borrow  or  lend  his  stocks,  after  which 
he  spends  a  half  hour  or  so  in  his  office,  going  over 
the  events  of  the  day  with  his  partners  and  cus- 
tomers, and  familiarizing  himself  with  the  day's 

*  July,  1912,  p.  94. 


THE  DAY  ON  'CHANGE  301 

doings.  The  specialists,  floor  traders,  and  two- 
dollar  men,  many  of  whom  have  no  partners  and 
no  ofiice  staff,  will  go  directly  home,  loitering 
perhaps  for  a  late  luncheon,  or  something  stronger, 
at  the  club  upstairs,  or  at  a  famous  cafe  across 
New  Street.  When  times  are  brisk  it  is  not  an 
uncommon  thing  for  partners  to  remain  at  their 
offices  until  a  late  hour,  and  clerks  are  often  on 
duty  until  the  small  hours  of  the  morning,  spend- 
ing what  is  left  of  the  night  at  a  nearby  hotel  in 
order  to  save  time. 

Holidays  are  not  numerous  on  the  Stock 
Exchange,  being  limited  to  the  days  set  apart 
by  law,  and  to  very  rare  occasions  in  dull  times 
when  by  petition  of  a  majority  of  the  members 
a  Saturday  half  holiday  is  granted  by  the  gover- 
nors. It  is  felt,  very  properly,  that  special  holi- 
days should  be  granted  but  rarely,  because  the 
intimate  relationship  of  the  banks  to  brokerage 
houses  is  such  that  whenever  the  banks  are  doing 
business  large  borrowers  should  always  be  pre- 
pared to  meet  calls  that  may  be  made  upon  them. 
On  the  London  Exchange,  what  with  bank 
holidays  and  the  festival  seasons  of  the  Church 
of  England,  the  stockbroker  has  many  more  holi- 
days than  his  American  colleague. 

Life  on  the  Stock  Exchange  is  by  no  means 
unpleasant.     It  is  not  the  idle  pastime  that  many 


302  THE  STOCK  EXCHANGE  FROM  WITHIN 

writers  picture  it,  with  easy  hours  and  long 
intervals  for  luncheon,  nor  is  it  the  depressing 
and  nerve-destroying  centre  that  many  of  the 
members  would  have  us  believe.  One  may  cer- 
tainly linger  over  the  midday  meal  for  hours  —  for 
that  matter  one  may  absent  one's  self  altogether 
—  and  conversely,  one  may  worry  and  fret  over 
the  day's  vexations  until  life  becomes  unpleasant 
for  him  and  for  every  one  near  him.  But  by  far 
the  larger  number  find  their  work  as  congenial  as 
earning  the  daily  bread  may  be,  and  vastly  more 
diverting  than  many  of  the  sedentary  occupations 
in  other  lines  of  business.  Elsewhere  I  have  said 
that  the  long  periods  of  dulness  on  the  floor 
constitute  the  most  serious  obstacle  the  broker 
has  to  meet.  Accustomed  to  physical  activity 
and  with  a  mind  inured  to  occupation,  he  chafes 
under  a  stagnation  that  is  foreign  to  his  habits  and 
desires,  until  worry  —  the  disease  of  the  age  — 
claims  him  for  its  own.  Almost  every  broker's 
wife  knows  what  I  mean.  It  becomes  a  habit  with 
such  a  man;  unconsciously  he  grows  "bearish" 
on  his  business,  on  himself,  and  on  his  associates, 
and  at  such  times  he  is  an  awful  bore. 

The  essential  thing  for  a  man  to  bear  in  mind 
who  finds  himself  growing  into  this  mood  is  that 
nature  abhors  a  vacuum.  His  mind  is  empty 
because  there  is  nothing  to  do;  he  must  therefore 


THE  DAY  ON  'CHANGE  303 

find  something  to  do  —  some  mental  occupation 
that  will  banish  from  his  mind  the  worries  that 
beset  him.  In  order  to  do  this  many  members 
of  the  Exchange  carry  some  light  reading  in  their 
pockets  for  use  in  an  idle  hour;  at  the  spot  where 
the  National  Lead  Company's  securities  are  dealt 
in  the  specialists  maintain  a  compact  circulating 
library  of  all  the  magazines  and  periodicals;  others 
spend  idle  moments  pouring  over  a  pocket  chess- 
board; the  Reading  Railway  post  has  a  constantly 
increasing  collection  of  all  kinds  of  puzzles,  riddles, 
problems  —  anything  to  keep  the  mind  active  on 
the  principle  of  similia  similibus  curantur. 

The  newcomer  on  the  Stock  Exchange  will  do 
well  to  fortify  himself  in  some  such  way,  for  it 
may  be  accepted  as  gospel  truth  that  the  paralyz- 
ing effect  of  worry  in  this  peculiar  environment 
will  inevitably  lead  to  hasty  actions,  mistakes,  and 
errors  of  judgment,  unless  the  victim  learns  early 
in  the  game  how  to  arm  himself  against  these 
misfortunes.  One  word  more:  When  the  day's 
work  is  done,  the  young  member  must  learn 
Doctor  Saleeby's  great  lesson,  that  a  round  of  the 
links,  or  a  set  at  tennis,  or  any  other  form  of  out- 
door diversions  so  dear  to  the  youngster's  heart, 
will  not  of  themselves  suffice  to  banish  cares. 

He  has  now  become  a  thinking  animal;  he  lives 
by  his  wits,  and  he  suffers  from  the  worries  inci- 


304  THE  STOCK  EXCHANGE  FROM  WITHIN 

dental  to  brain  work  coupled  with  responsibility. 
I  have  just  said  that  nature  abhors  a  vacuum  — 
in  his  case  this  especially  applies  to  his  mind. 
Care  and  worry  are  not  driven  away  merely  be- 
cause he  has  made  his  "round"  in  80  strokes  — 
they  must  be  pushed  out  by  something  else,  some- 
thing more  than  mere  play  or  sport  per  se.  What 
he  requires  is  a  new  mental  interest,  not  merely  to 
serve  as  a  counter-irritant  for  the  worries  of  to-day, 
but  as  an  investment  for  all  the  years  that  are 
before  him.  He  must  have  a  "hobby"  of  some 
sort,  no  matter  what,  so  long  as  it  is  a  mental 
occupation  which  he  does  for  the  love  of  it  — 
books,  pictures,  music,  postage  stamps  —  any- 
thing will  do  the  trick  so  long  as  it  occupies  the 
mind  and  is  done  for  fun.  We  old  timers  have 
only  to  look  about  us  on  the  Board  to  see  who  the 
really  happy  men  are,  the  men  who  are  never 
nuisances.  They  are  the  men  whose  minds  are 
not  content  with  doing  nothing.* 

In  the  matter  of  creature  comforts,  members 
of  the  New  York  Stock  Exchange  have  provided 
themselves  with  everything  that  gentlemen  re- 
quire. Their  beautiful  building,  an  architectural 
masterpiece  and  one  of  the  city's  ornaments, 
has  often  been  described;  here  it  is  sufficient  to 


*  "Worry,  the  Disease  of  the  Age,"  by  C.  W.  Saleeby,  M.  D.,  F.  A. 
Stokes  Co.  (New  York,  1907). 


THE  DAY  ON    CHANGE  305 

say  that  nothing  is  lacking  in  the  way  of  con- 
veniences necessary  to  the  physical  ease  of  the 
members.  Barbers,  valets,  messengers,  and 
attendants  of  every  description  are  on  duty;  a 
well-equipped  hospital  room  is  ready  for  emer- 
gencies; showers  and  needle-baths,  smoking-rooms, 
lounges,  writing-rooms,  reading-rooms,  coffee- 
rooms,  and  a  spacious  luncheon  club,  contribute 
their  share  to  the  refreshment  of  the  outer  and 
inner  man.  The  luncheon  club,  which  occupies 
the  whole  upper  floor,  is  the  last  word  in  culi- 
nary perfection.  In  the  lounging-rooms  adjoining 
are  all  the  magazines  and  periodicals,  and  the 
walls  are  covered  with  a  collection  of  rare  prints 
of  old  New  York,  together  with  mounted  trophies 
of  the  hunt  presented  by  sportsmen  members. 
In  other  days  before  the  Exchange  built  its  present 
structure  the  club  was  housed  in  modest  quarters 
across  New  Street  and  a  few  non-members  of  the 
Exchange  were  admitted  to  membership,  but  now 
its  facilities  are  taxed  to  meet  the  demand,  and 
membership  is  restricted  to  the  Stock  Exchange, 
although  guests  are  admitted  at  all  hours. 

The  atmosphere  in  the  city  is  often  trying  in  the 
summer  months  because  of  the  excessive  humidity, 
and  extraordinary  measures  were  resorted  to  in 
the  construction  of  the  building  to  minimize  this 
unpleasantness  on  the  crowded  floor,  where  the 


3o6  THE  STOCK  EXCHANGE  FROM  WITHIN 

presence  of  a  large  number  of  men  in  a  greater  or 
less  degree  of  physical  animation  but  adds  to  the 
general  discomfort.  To  meet  this  condition  an 
air-cooling  plant  was  provided  —  the  first  and 
the  foremost  example  of  its  kind  in  existence, 
both  in  point  of  magnitude  and  in  the  exacting 
demands  involved.  By  means  of  this  remarkable 
triumph  of  mechanical  skill,  outer  air  at  a  tem- 
perature of  say  90°  is  taken  into  the  basement, 
eighteen  hundred  pounds  of  water  (humidity) 
are  squeezed  out  of  it  per  hour,  it  is  purified  and 
cleansed  through  many  walls  of  cheesecloth,  the 
temperature  is  refrigerated  down  to  60°,  and 
then,  after  again  raising  it  to  a  point  at  which 
no  dangerous  results  may  affect  a  member  passing 
in  and  out  of  the  room,  it  is  finally  supplied  to 
the  great  floor  and  again  exhausted  by  methods 
that  obviate  drafts  or  dangerous  currents  of  any 
kind.  Aside  from  the  members  and  attendants, 
the  only  person  having  access  to  the  floor  is  the 
chief  engineer  who  controls  this  remarkable  air- 
cooling  plant.  A  wizard  in  a  way,  it  Is  curious 
to  watch  him  threading  In  and  out  of  the  busy 
crowds,  tasting  and  feeling  the  air  which,  under 
the  black  art  of  his  necromancy,  turns  Intolerable 
conditions  Into  others  quite  delightful. 

The  history  of  the  New  York  Stock  Exchange 
has  been  written  many  times,  and  need  be  but 


THE  DAY  ON  'CHANGE  307 

briefly  referred  to  here.  Something  approaching 
an  organization  was  eflpected  May  17,  1792,  when, 
under  a  tree  which  stood  opposite  what  is  now 
60  Wall  Street,  twenty-four  "Brokers  for  the 
Purchase  and  Sale  of  Public  Stocks"  signed  an 
agreement  to  charge  not  less  than  a  commission 
of  I  per  cent.  It  was  a  day  of  small  things;  the 
national  debt  was  but  $17,993,000;  there  was 
but  one  bank  in  the  town.  Through  the  frag- 
mentary data  that  has  survived,  we  learn  that 
occasional  meetings  of  the  brokers  were  held 
during  the  next  twenty-five  years  at  the  old 
Tontine  Coffee  House,  at  Wall  and  Water  streets. 
In  1817  the  formal  organization  was  effected  and 
the  meeting-place  fixed  at  the  Merchants'  Ex- 
change, later  the  site  of  the  Custom  House,  and 
now  the  property  of  the  National  City  Bank.  In 
1853  the  Stock  Exchange  moved  to  Beaver  Street 
and  in  1865  to  its  present  situation.  The 
"Open  Board  of  Brokers,"  a  rival  organization, 
was  absorbed  in  1869,  and  ten  years  later  the 
"Gold  Board"  also  joined  forces  with  the  parent 
body. 

The  development  of  the  New  York  Stock 
Exchange  in  its  early  days  was  but  a  record  of 
the  country's  growth,  and  this  in  turn  depended 
upon  speculation.  It  was,  indeed,  speculation 
such  as  the  world  had  never  witnessed.     How  our 


3o8  THE  STOCK  EXCHANGE  FROM  WITHIN 

western  borders  were  extended  as  the  railroads 
pushed  onward;  how  trade  was  stimulated 
throughout  Christendom  by  the  discovery  of  gold 
in  California;  how  the  national  debt  expanded 
a  I  the  time  of  the  Civil  War;  and  how,  after  the 
war,  construction  went  ahead  at  tremendous 
pace  —  all  these  served  to  fan  the  flames  of  adven- 
ture and  enterprise,  which  are  the  bases  of  specu- 
lation. The  panics  of  1837,  1857,  and  1873, 
severe  enough  to  give  pause  to  another  and  less 
vigorous  nation,  seem  in  the  retrospect  to  have 
been  but  starting  points  for  a  fresh  development 
of  the  national  spirit  —  a  spirit  which  owes  to 
speculation  the  extension  of  frontiers,  the  bridging 
of  waters,  the  unlocking  of  mountains,  and  the 
transportation  of  wealth.  In  this  splendid  work 
of  conquering  a  continent  the  Stock  Exchange 
has  kept  pace  with  the  march  of  Industry.  It  has 
supplied  the  one  great  central  market  for  the 
expression  of  the  country's  progress  as  measured 
by  the  country's  securities,  and  it  will  continue 
to  do  so  as  long  as  an  evergreen  faith  in  America 
exists  among  Its  people. 

The  Stock  Exchange  is  often  defined  as  the 
nerve-centre  of  the  world,  and,  just  as  every 
happening  of  importance  finds  an  instant  effect 
on  the  market,  so  members  instinctively  apply 
to  current  events  habits  of  close  analysis  and  nice 


THE  DAY  ON  'CHANGE  309 

discrimination.  A  failure  at  Amsterdam  may 
result  in  liquidation  in  Atchisons,  long  a  favorite 
of  Dutch  investors;  prolonged  drought  in  the 
Argentine  may  increase  our  foreign  shipments  of 
grain;  a  great  engineering  project,  like  the  Assouan 
Dam,  may  lead  to  handsome  contracts  for  Ameri- 
can steel-makers;  any  fluctuation  in  rates  of  for- 
eign exchange  must  be  watched  carefully  to  see  if 
exports  or  imports  of  gold  are  impending;  if  a  rich 
man  dies  possessed  of  large  amounts  of  certain 
securities,  sellers  must  be  critically  observed  for 
evidences  of  liquidation  by  the  heirs;  speeches  in 
Congress  or  in  Parliament,  or  the  unguarded  utter- 
ances of  statesmen,  must  be  weighed  and  measured 
for  their  effect  on  the  public  mind;  a  great  fire 
may  lead  to  selling  of  investments  by  insurance 
companies;  a  revolution  in  Mexico  may  imperil 
American  investments  there;  if  there  are  political 
disturbances  in  the  Balkans,  the  continental 
Bourses  may  be  frightened;  every  move  of  the 
great  foreign  banks  must  then  be  watched  closely, 
for  the  bankers  to-day  are  the  war-lords  of  crea- 
tion, and  so  every  event  of  importance  the  world 
over  makes  its  impression  on  the  Stock  Exchange 
barometer. 

What  is  going  on  in  the  Transvaal  or  in  Alaska, 
the  latest  outbreak  in  China,  the  areas  of  baro- 
metric pressure  in  the  grain  country,  the  ravages 


3IO  THE  STOCK  EXCHANGE  FROM  WITHIN 

of  the  boll-weevil,  the  market  in  pig  iron,  the 
latest  labor  difficulty,  the  tendencies  of  Socialism, 
the  cost  of  living,  the  outgivings  of  our  law-makers 
—  a  knowledge  of  all  these  and  many  similar 
matters  is  a  necessary  part  of  the  stockbroker's 
trade,  and  serves  to  keep  his  mental  activities 
considerably  above  the  dull  level  of  mediocrity. 
Naturally  this  sort  of  occupation  gives  a  zest  to 
life,  and  makes  impossible  the  sedentary  dry-rot 
which  the  impatient  broker  sometimes  thinks  is 
upon  him.  At  any  rate  no  Sherman  Law  can  be 
invoked  to  prevent  him  from  learning  all  there  is 
to  know  about  men  and  affairs;  and  just  as  he 
becomes  trained  in  habits  of  inquiry,  and  proficient 
in  using  facts  as  stepping-stones  to  conclusions, 
so  he  becomes  a  valuable  and  useful  member  of 
the  community. 

Critics  in  what  may  be  termed  the  impressionist 
school  —  accustomed  to  a  free,  instantaneous,  and 
often  meaningless  handling  of  their  subject  —  are 
prone  to  condemn  the  Exchange  because  the 
action  of  the  market  when  large  reforms  in 
business  are  impending  seems  to  imply  hostility 
to  those  reforms  on  the  part  of  members.  This 
may  be  typical  modern  impressionism,  but  it  is  all 
wrong.  If  the  market  declines  when,  for  example, 
a  large  corporation  finds  itself  at  odds  with  the 
law,    the    downward    tendency   of   the    securities 


THE  DAY  ON  'CHANGE  311 

affected  is  the  result  of  natural  laws  with  which 
stockbrokers  have  nothing  to  do.  They  arc  but 
agents.  Ten  thousand  owners  of  securities 
throughout  the  land  may  simultaneously  be- 
come alarmed  and  sell  —  a  familiar  psychologic 
phenomenon  which  depresses  prices  —  but  to  say 
that  this  result  expresses  the  hostility  of  the 
Stock  Exchange  to  the  enforcement  of  the 
Anti-Trust  Law  is  nothing  less  than  an  evidence 
of  critical  strabismus. 

The  men  for  whom  I  presume  to  speak,  far 
from  being  hostile  or  indifferent  to  the  call  of 
revitalized  business  morality,  are  quite  as  deeply 
imbued  with  the  potent  spirit  of  business  reform 
as  are  the  men  who  make  the  country's  laws. 
Careful,  well-considered  legislation  that  broadens 
and  deepens  the  channels  of  American  develop- 
ment, that  provides  adequate  supervision  and 
such  publicity  as  will  guard  against  selfish  per- 
version, is  welcomed  with  gratitude  by  the  Stock 
Exchange.  Any  thinking  man  ought  to  see  at 
a  glance  that  the  very  object  of  the  Exchange's 
existence  is  benefited  by  such  laws,  and  prospers 
with  their  enforcement.  The  Cordage  Trust,  the 
Salt  Trust,  the  Bicycle  combination  and  the  Hock- 
ing Coal  episode  are  still  bitter  memories  on 
'Change;  any  law  that  will  prevent  a  recurrence 
of  these   and    kindred    calamities    is    a    law   that 


312  THE  STOCK  EXCHANGE  FROM  WITHIN 

strengthens  the  hands  of  every  member  and  gives 
him  fresh  courage. 

It  would  be  difficult  to  find  anywhere  a  more 
intelligent  and  interesting  group  of  men  than  the 
members  of  the  New  York  Stock  Exchange. 
Some  of  them  are  men  of  peculiar  personal  charm, 
others  are  distinguished  for  especial  ability  in  vari- 
ous ways,  others  are  men  with  hobbies,  nearly 
every  one  knows  something  that  is  worth  knowing, 
and,  what  is  better,  talks  of  what  he  knows  in  the 
manner  of  culture.  Given  an  idle  hour  with  a 
wish  to  learn,  and  every  dip  of  the  net  into  the 
intellectual  waters  of  this  gathering  brings  up 
some  new  and  delightful  specimen  to  amuse  and 
instruct. 

The  dean  of  the  Stock  Exchange,  for  example, 
who  has  been  an  active  member  for  fifty-five 
years,  and  who  is  now  eighty,  spends  several 
months  of  each  year  in  exploring  all  the  little 
nooks  and  crannies  of  the  globe,  remote  and 
inaccessible  places  that  are  terra  incognita  to 
your  casual  tourist.  He  is  a  mine  of  information; 
to  know  him  means,  in  a  way,  a  liberal  education. 
If  you  are  fortunate  enough  to  have  an  hour's 
chat  with  him  (for  when  at  work  on  the  floor  he  is 
quite  as  active  as  any  other  youngster),  you  will 
find  yourself  in  contact  with  a  traveler  of  rare 
charm  and  culture,  who  will  take  you  into  strange 


THE  DAY  ON  'CHANGE  313 

lands  of  which  the  mere  existence  is  but  a  faint 
recollection  of  your  schoolboy  studies. 

He  will  tell  you,  with  all  his  delightfully 
fresh  and  buoyant  enthusiasm,  of  Agra  and  its 
Pearl  Mosque,  and  of  the  surpassing  beauty 
of  the  world's  architectural  masterpiece  — 
the  Taj  Mahal  —  with  its  marbles,  its  mo- 
saics, and  its  lapis-lazuli.  He  will  take  you 
into  Thibet,  the  Forbidden  Land,  through  the 
jungles  of  the  faraway  Celebes,  into  the  least- 
known  corners  of  the  Straits  Settlements,  and  to 
the  lonely  isle  of  Robinson  Crusoe.  On  his  vaca- 
tion next  year  he  is  going  to  the  Falkland  Islands, 
somewhere  down  Patagonia  way,  and  the  year 
after  a  letter  may  come  from  him  sent  out  from 
the  headwaters  of  the  Yukon,  or  ferried  down 
the  Congo  from  Stanley  Falls.  Wherever  his 
fancy  roams,  there  this  adventurer  goes;  no 
thought  of  sickness  or  danger  or  difficulty  is  per- 
mitted to  interfere  with  his  delightful  hobby. 

Naturally,  in  the  cosmopolitan  atmosphere  of  the 
Stock  Exchange  tastes  are  catholic  and  run  to  wide 
extremes.  One  of  the  members  is  a  student  of 
Russian  literature  in  all  its  phases;  he  can  tell  you 
of  its  folklore,  its  peasantism,  its  liberal  thought 
and  its  ethical  ideals  of  society;  Dostoyevski  is  his 
hobby  and  Melshin  the  poet.  Beside  him  stands 
a  man  who  has  mastered  the  culinary  art;  the  joy 


314  THE  STOCK  EXCHANGE  FROM  WITHIN 

of  his  life  is  to  prepare  with  his  own  hands,  for  the 
palates  of  his  fastidious  guests,  dainty  dishes  and 
wonderful  sauces  that  make  an  invitation  to  his 
table  something  worth  having.  On-e  of  the 
members  is  an  animated  concordance  of  Shelley, 
whom  he  studies  with  almost  fanatical  zeal; 
another  is  a  disciple  of  Heine,  whom  he  adores. 
There  stands  a  man  who  went  into  the  heart 
of  Africa  as  no  white  man  had  ever  done  — 
through  Somaliland  into  Abyssinia,  thence  to 
Lake  Rudolph  to  hunt  elephants,  south  to  Victoria 
Nyanza,  and  finally,  after  hunting  all  the  wild 
game  of  the  district,  on  foot  to  the  West  Coast. 

Near  by  is  a  traveler  fresh  from  Mukden,  the 
scene  of  the- world's  greatest  battle;  he  can  tell 
you,  too,  some  curious  and  little-known  details  of 
the  awful  engagement  at  203-Metre  Hill.  Our 
Civil  War  has  its  survivors  in  a  dozen  Board  mem- 
bers of  to-day.  One  of  them  was  shot  twice  at 
Shiloh  and  lived  to  fight  the  Sioux;  another  was 
a  captain  under  Burnside  at  Antietam,  charged  the 
bridge  at  the  head  of  all  that  was  left  of  his  com- 
pany, and  was  rewarded  for  conspicuous  gallantry; 
another  was  shot  through  the  lungs  at  the  second 
battle  of  Bull  Run  and  lived  through  the  carnage 
at  Gettysburg;  another  was  thrice  wounded  at 
Gettysburg  and  again  in  the  Wilderness. 

Here  are  some  who  charged  up  Kettle  Hill  and 


THE  DAY  ON  'CHANGE  315 

San  Juan  Hill  In  Cuba,  and  there  are  men  who 
served  in  the  navy  throughout  that  war.  Officers 
of  high  rank  in  the  National  Guard  and  the  Naval 
Reserve,  members  of  important  public  bodies, 
such  as  the  Municipal  Art  Commission,  the 
Palisades  Commission,  the  Public  School  Board 
and  the  various  hospital  boards;  mayors  and  other 
officers  of  suburban  communities,  sheriffs  and 
deputy-sheriffs,  presidents  of  clubs,  wardens  and 
vestrymen  of  churches,  men  beloved  for  their 
philanthropies,  Oxford  men,  Cambridge  men, 
Heidelberg  men,  graduates  of  all  the  American, 
universities  —  with  these  and  very  many  more 
like  them,  one  is  brought  into  intimate  daily 
contact. 

There  is  a  legion  of  collectors,  and  these  are 
always  interesting  people.  One  of  them  "goes 
in"  for  old  silver,  of  which  he  has  gathered  a 
valuable  display;  many  others  collect  prints,, 
etchings,  or  paintings;  another  takes  pardonable 
pride  in  his  Elizabethan  early  editions,  particularly 
his  First  Folio;  another  has  published  a  standard 
work  on  the  portraits  of  Lincoln,  of  which  he 
possesses  nine  original  negatives  and  many  rare 
copies  of  negatives;  others  devote  leisure  hours 
to  collecting  porcelains  and  ceramics  of  all  kinds, 
postage-stamps,  coins,  rugs,  and  tapestries.  You 
will  find  here  men  of  bucolic  tastes,  with  hobbies 


3i6  THE  STOCK  EXCHANGE  FROM  WITHIN 

in  farms  and  extensive  country  estates,  where  one 
grows  rare  orchids  and  another  breeds  highly 
prized  cattle,  or  sheep,  or  horses,  or  dogs,  or 
poultry. 

As  you  pause  in  the  day's  work  to  listen  to 
these  interesting  people  talking  of  their  pet  diver- 
sions, you  see  why  it  is  that  hobbies  are  so  neces- 
sary to  the  modern  mind,  and  particularly  to  the 
worried  mind  of  the  Stock  Exchange  man.  You 
see  that  the  man  who  has  nothing  to  divert  him 
in  leisure  hours  is  becoming  a  really  rare  type, 
whereas  the  man  of  curious,  busy,  and  active 
brain,  who  must  have  a  .hobby  to  be  happy,  is 
becoming  more  and  more  common.  In  this  very 
marked  tendency  among  the  members  of  the 
Exchange  there  has  been  a  great  improvement 
within  the  last  decade,  and  one,  as  I  have  said, 
that  not  only  serves  to  banish  the  cares  of  to-day, 
but  promises  to  become  a  valuable  investment 
for  the  years  that  lie  ahead. 

There  are  some  talented  musicians  on  the  floor, 
men  who  are  not  only  proficient  themselves,  but 
who  by  their  liberal  support  of  all  forms  of  music 
do  much  to  encourage  and  maintain  New  York's 
supremacy  as  a  musical  centre.  Grand  opera, 
the  Philharmonic  Society,  the  symphony  orches- 
tras, the  choral  organizations,  and  the  army  of 
virtuosi  from  abroad  who  have  earned  applause 


THE  DAY  ON  'CHANGE  317 

and  money  on  these  shores  —  all  are  accorded 
cordial  support  by  Stock  Exchange  members. 
One  of  them  gives  rein  to  his  altruistic  tendencies 
by  providing  free  concerts  once  a  week  for  the 
submerged  tenth  in  a  crowded  foreign  quarter  of 
the  East  Side. 

In  the  realm  of  amateur  sport  and  sportsmanship 
the  Exchange  has  many  enthusiastic  devotees. 
There  are  several  tennis  champions,  one  of  them 
holding  a  title  in  singles  for  seven  years,  and 
another  a  title  in  doubles  for  five  years.  Fa- 
mous university  oarsmen,  football  and  baseball 
players,  American  golf  champions,  expert  yachts- 
men and  commodores  of  fleets,  four-in-hand 
drivers,  polo  players,  horse-show  judges,  breeders 
and.  owners  of  famous  stables,  racquet,  court- 
tennis,  and  squash  champions,  deep-sea  fishermen 
and  disciples  of  the  placid  Izaak,  who  lure  their 
game  from  cowslip  banks;  hunters  in  every 
quarter  of  the  world,  motor-boat  racers,  swimmers, 
men  of  muscle  and  mind,  men  of  brain  and  brawn, 
these  are  types  that  keep  ever  in  mind  the  joie 
de  vivre,  the  blue  sky  above,  and  all  the  stimulating 
enthusiasms  of  youth. 

There  is  little  need  to  speak  of  the  New  York 
Stock  Exchange's  charities  and  benefactions, 
because  these  are  well  known.  Scarcely  a  day 
passes  that  some  one  of  the  members  does  not 


3i8  THE  STOCK  EXCHANGE  FROM  WITHIN 

ask  of  his  fellows  a  contribution,  however  small, 
for  a  worthy  charity  with  which  he  or  the  ladies 
•of  his  family  have  come  in  contact,  and  Invariably 
the  mite  is  freely  given,  although  there  may  not 
be  time  to  spare  to  hear  the  story.  The  private 
and  unostentatious  benefactions  of  members  go 
on  at  all  times,  and  cannot  be'  discussed  here. 

When  the  Titanic  went  down,  a  fund  of  $25,000 
was  raised  in  a  day,  and  a  committee  of  members 
of  the  Exchange  was  on  the  pier  when  the  sur- 
vivors arrived  to  do  what  could  be  done.  The 
Mississippi  floods  met  with  a  similar  response; 
indeed,  every  great  calamity  that  spells  suffering 
and  sorrow  and  need  finds  an  instant  expression 
of  sympathy  and  practical  assistance  from  the 
floor.  In  times  of  national  gravity,  such  a-s  an 
outbreak  of  war,  the  Exchange  will  alway  be 
heard  from  with  its  volunteers  and  its  funds 
for  equipping  a  regiment;  hospitals,  churches, 
and  all  worthy  charities  well  know  that  appeals 
are  responded  to  with  a  zeal  that  is  alike  non- 
sectarian  and  generous. 

Never  in  my  experience  on  the  floor  have  I 
heard  a  complaint  from  a  deserving  employee 
of  the  Stock  Exchange.  Salaries  are  wisely  in- 
creased with  length  of  service,  pensions  are  given 
by  the  governors  to  aged  servants;  hospitals, 
medical   treatment,   nurses,    and    sanitariums  are 


THE  DAY  ON  'CHANGE  319 

provided  for  the  sick,  and  funds  are  supplied  to 
families  of  deceased  employees.  A  spirit  of  help- 
fulness, sympathy,  and  generosity  is  in  the  very 
air  of  the  Stock  Exchange,  an  absolutely  fine  spirit 
that  takes  pride,  too,  in  caring  for  its  own  members 
who  have  been  unfortunate. 

Finally,  let  it  be  said  that  the  Stock  Exchange 
man  is  human.  He  knows  the  "rub  of  the  green," 
•  he  suffers  as  all  men  suffer,  but  he  does  not  com- 
plain, nor  solicit  odds.  All  he  asks  is  fair  play; 
a  little  patient  study  of  what  the  Exchange  stands 
for;  a  little  better  understanding  of  its  usefulness 
in  our  commercial  life;  a  little  recognition  of  each 
man's  effort  to  uphold  a  high  standard  of  business 
honor;  a  little  of  the  cordial  support  which  he 
himself,  with  stout  optimism,  extends  to  every 
worthy  thing. 


CHAPTER  IX 

THE  LONDON  STOCK  EXCHANGE,  AND  COMPARISONS 
WITH  ITS  NEW  YORK  PROTOTYPE 


CHAPTER  IX 

THE  LONDON  STOCK  EXCHANGE,   AND  COMPARISONS 
WITH    ITS    NEW    YORK    PROTOTYPE 

There  were  Exchanges  in  London  in  the  sixteenth 
century.  Merchants  from  Lombardy  had  given 
their  name  to  a  street,  and  had  flourished  so 
well  that  they  had  branched  out  in  the  business 
of  money-changing —  that  is,  of  exchanging  worn, 
abrased  and  clipped  coins,  foreign  and  domestic, 
for  those  of  standard  weight  and  fineness.  As 
trade  increased  and  the  first  faint  signs  of  progress 
in  the  matter  of  wealth  began  to  develop,  it  was 
seen  that  this  business  of  exchanging  money  was 
sufficiently  important  to  warrant  royal  recogni- 
tion; accordingly  there  was  created  the  office  of 
Royal  Exchanger,  and  the  person  entrusted  with 
this  office  was  given  the  privilege  of  exchanging 
coins  in  the  manner  described.  Smaller  offices 
for  the  purpose  were  farmed  out  in  other  English 
towns,  and  each  place  where  the  business  was 
carried  on  thus  came  to  be  known  as  "The  Ex- 
change," a  name  that  was  ultimately  applied  to 

323 


324  THE  STOCK  EXCHANGE  FROM  WITHIN 

any  covered  place  where  merchants  met  to  buy 
and  sell  commodities. 

After  the  money-changers  came  the  money- 
lenders—  Jews,  more  Lombards,  and  finally  the 
Guild  of  Goldsmiths.  The  last  named,  having 
long  practised  the  business  of  money-lending, 
finally  became  money-borrowers,  issuing  receipts 
for  these  borrowings  known  as  Goldsmiths'  Notes 
—  the  earliest  form  of  English  bank-notes  —  and 
the  first  step  in  the  convenient  process  of  trans- 
lating capital,  and  debt,  and  credit,  into  bits  of 
interest-bearing  paper.*  This  was  the  state  of 
English  finance  until  1694,  when  the  Bank  of 
England  was  founded,  and  stocks  and  shares 
came  into  being  since  the  bank  was  a  joint-stock 
affair.  That  the  invention  of  stock  certificates 
was  a  popular  one,  and  that  the  authorities  and 
the  public  seized  upon  it  as  a  convenient  means 
of  directing  capital  into  new  and  hitherto  untried 
forms  of  enterprise  is  seen  by  the  rapidity  with 
which  fresh  undertakings  were  put  forth.  In 
1698   the  New  East  India   Company  loaned   its 


*  The  English  Exchequer  has  left  a  permanent  impression  on  the  language 
no  less  than  on  the  world's  finance.  Such  words  as  "cheque,"  "tally," 
and  "stocks,"  in  the  sense  of  securities,  possess  an  interesting  history  easy 
to  trace.  If  one  lent  money  to  the  Bank  of  England  down  to  so  compara- 
tively recent  a  period  as  one  hundred  years  ago,  tallies  for  the  amount  were 
cut  on  willow  sticks  just  as  they  were  cut  at  the  Exchequer  in  the  time 
of  the  Crusades;  the  bank  kept  the  "foil,"  and  the  lender  the  "stock" — ■ 
the  earliest  "bank-stock"  on  record.  Very  recently  a  bag  of  Exchequer 
tallies  was  found  in  a  chapel  of  Westminster  Abbey. 


THE  LONDON  STOCK  EXCHANGE        325 

capital  to  the  government;  by  171 1  there  was  a 
funded  debt  of  £11,750,000  in  the  shape  of  bank 
stock,  East  India  stock,  and  annuities.  There 
was  also  the  famous  South  Sea  Company,  to  be 
followed  ten  years  later  by  a  reorganization  of  the 
company  with  its  first  subscription  of  a  million 
in  £100  stock  at  £300,  and  a  second  and  third 
subscription  of  larger  magnitude,  each  accom- 
panied by  prodigious  pi'omises,  and  each  snapped 
up  with  avidity  by  a  public  saturated  with  the 
new  and  hazardous  pastime  of  speculation. 

"All  distinction  of  party,  religion,  sex,  char- 
acter, and  circumstance,"  writes  Smollett,  the 
historian  of  the  time,  "were  swallowed  up  in  this 
universal  concern.  Exchange  Alley  was  filled 
with  a  strange  concourse  of  statesmen  and  clergy- 
men, churchmen  and  dissenters,  Whigs  and 
Tories,  physicians,  lawyers,  tradesmen,  and  even 
with  m.ultitudes  of  females.  All  other  professions 
and  employments  were  utterly  neglected;  and  the 
people's  attention  wholly  engrossed  by  this  and 
other  chimerical  schemes,  which  were  known  by 
the  denomination  of  bubbles.  New  companies 
started  up  every  day,  under  the  countenance  of 
the  prime  nobility.  The  Prince  of  Wales  was 
constituted  governor  of  the  Welsh  Copper  Com- 
pany; the  Duke  of  Chandos  appeared  at  the  head  of 
the  York  Buildings  Company;  the  Duke  of  Bridge- 


326  THE  STOCK  EXCHANGE  FROM  WITHIN 

water  formed  a  third,  for  building  houses  in  London 
and  Westminster.  About  a  hundred  such  schemes 
were  projected  and  put  in  execution,  to  the  ruin 
of  many  thousands.  The  sums  proposed  to  be 
raised  by  these  expedients  amounted  to  three 
hundred  millions  sterling,  which  exceeded  the 
value  of  all  the  lands  in  England.  The  nation  was 
so  intoxicated  with  the  spirit  of  adventure  that 
people  became  a  prey  to'  the  grossest  delusion. 
An  obscure  projector  pretending  to  have  formed 
a  very  advantageous  scheme,  which,  however,  he 
did  not  explain,  published  proposals  for  a  sub- 
scription in  which  he  promised  that  in  one  month 
the  particulars  of  his  project  should  be  disclosed* 
In  the  meantime  he  declared  that  every  person 
paying  two  guineas  should  be  entitled  to  a 
subscription  for  £ioo,  which  would  produce  that 
sum  yearly.  In  the  forenoon  this  adventurer 
received  a  thousand  of  these  subscriptions;  and  in 
the  evening  set  out  for  another  kingdom." 

No  sooner  were  there  bits  of  paper  to  deal  In 
than  jobbers  or  brokers  sprang  up  to  handle 
them,  and  by  natural  gregarious  processes  these 
dealers  gathered  in  one  spot.  Thus  competition 
was  stimulated  and  active  markets  created. 
The  rotunda  of  the  bank  and  the  Royal  Exchange 
were  their  first  haunts,  indeed  until  Archbishop 
Laud  drove  them  out  they  were  to  be  found  bar- 


THE  LONDON  STOCK  EXCHANGE   327 

gaining  on  the  wide  floors  of  St.  Paul's  Cathedral. 
As  the  business  expanded  they  took  to  the  neigh- 
boring streets  and  coffee  houses,  and  so  Change 
Alley,  Jonathan's  Coffee  House,  Cornhill,  Lom- 
bard Street  and  Sweeting's  Alley  became  their 
familiar  retreats.  Old  Jonathan's  burned  down 
in  1748  and  New  Jonathan's  in  Threadneedle 
Street  succeeded  it.  Here,  in  July,  1773,  "the 
brokers  and  others  at  New  Jonathan's  came  to  a 
resolution  that,  instead  of  its  being  called  New 
Jonathan's,  it  should  be  called  'The  Stock  Ex- 
change,' which  is  to  be  wrote  over  the  door." 
Thus  while  business  in  the  public  funds  was  still 
conducted  on  a  large  scale  at  the  bank,  and  deal- 
ings in  foreign  securities  still  centred  at  the  Royal 
Exchange,  London  may  be  said  to  have  had  a 
Stock  Exchange  in  the  modern  sense  from  that 
day  in  1773  when  the  name  was  "wrote  over  the 
door"  at  New  Jonathan's.* 

We  have  authority  for  the  early  history  of  the 
London  Stock  Exchange  in  a  report  made  in  1877 
by  the  officials  of  the  institution  to  the  Royal 
Commission.     From  this  report  it  appears  that 


*The  first  Stock  Exchange  book  was  published  in  1761  —  "Every  Man 
His  Own  Broker,  or  a  Guide  to  Exchange  Alley,"  by  J.  Mortimer.  Mor- 
timer, Mr.  Hirst  tells  us,  had  been  British  Consul  in  Holland,  and  had 
seen  the  workings  of  the  Amsterdam  Bourse  and  the  arbitrage  business 
between  London  and  Amsterdam,  which  was  considerable  in  the  middle 
of  the  eighteenth  century.  The  book  shows  that  many  phases  of  speculation 
were  already  in  vogue  before  the  Stock  Exchange  was  formally  organized. 


328  THE  STOCK  EXCIL\NGE  FROM  WITHIN 

the  Stock  Exchange  at  New  Jonathan's  In  1773 
"afforded  a  ready  market  for  the  operations  of 
the  bankers,  merchants,  and  capitalists  connected 
with  the  floating  of  the  numerous  loans  raised  at 
that  period  for  the  service  of  the  State."  The 
members  or  frequenters  paid  a  subscription  of 
sixpence  to  defray  expenses,  drew  up  rules,  and 
placed  its  control  in  the  hands  of  a  "Committee 
for  General  Purposes."  The  functions  of  this 
committee  were  then,  as  now,  "judicial  as  regards 
the  settlement  of  disputed  bargains,  and  adminis- 
trative as  regards  rules  for  the  general  conduct 
of  business  and  for  the  liquidation  of  defaulter's 
accounts."  The  earliest  minutes  on  record  are 
dated  December,  1798, 

War  loans  and  a  national  debt  increasing  by 
leaps  and  bounds,  with  consequent  activity  in 
corLsols,  was  the  principal  source  of  business  in 
those  early  days,  and  as  these  increased,  so  also 
the  savings  of  the  public  and  a  new  national 
spirit  led  to  a  steady  growth  in  the  business  of 
dealing  in  securities.  The  dim  receding  voice 
of  those  early  days  still  echoes  in  Capel  Court 
through  the  medium  of  two  holidays  —  May  1st 
and  November  1st.  More  than  a  century  ago 
these  days  marked  the  closing  of  the  Bank  of 
England's  books  for  the  transfer  of  consols,  and 
as  consols  were  the  only  things   then  traded  in, 


THE  LONDON  STOCK  EXCHANGE        329 

there  was  nothing  for  stockbrokers  to  do  on  those 
occasions;  hence  they  took  a  holiday.  And  they 
still  close  the  Exchange  on  these  days  —  an  elo- 
quent instance  of  the  Englishman's  adherence  to 
tradition. 

By  1 801  there  was  not  room  enough  in  the 
old  building,  and,  moreover,  the  report  says: 
"It  became  apparent  that  the  indiscriminate 
admission  of  the  public  was  calculated  to  expose 
the  dealers  to  the  loss  of  valuable  property.'* 
Accordingly  a  group  of  Stock  Exchange  men 
acquired  a  site  in  Capel  Court,  close  to  the  bank, 
raised  a  capital  of  £20,000  in  four  hundred  shares 
of  £50  each,  and  in  May,  1801,  laid  the  foundation 
of  what  has  become  through  numerous  additions 
the  London  Stock  Exchange  of  to-day.  The 
building  was  opened  in  March,  1802,  with  a  list 
of  five  hundred  subscribers,  and  the  deed  of  settle- 
ment (March  27,  1802),  vested  the  management 
in  a  committee  of  thirty  members,  chosen  annually 
by  ballot,  with  nine  trustees  and  managers,  sepa- 
rate from  the  committee,  to  have  charge  of  the 
treasury  and  represent  the  proprietors.  Although 
the  rules  and  regulations  have  been  amended  and 
enlarged  from  time  to  time  to  meet  new  conditions, 
the  constitution  of  the  London  Stock  Exchange 
remains  substantially  unaltered. 

As  it  stands  to-day,  there  are  nine  managers 


330  THE  STOCK  EXCHANGE  FROM  WITHIN 

who  represent  the  shareholders  or  proprietors, 
and  thirty  committeemen,  who  look  after  the 
administration  of  the  Exchange  and  the  well- 
being  of  the  members.  The  managers  are  elected 
in  threes  for  terms  of  five  years  by  the  votes  of 
the  shareholders.  They  fix  the  admission  fees, 
appoint  almost  all  the  officials,  and  look  after 
the  building  and  the  property  in  general,  while 
the  thirty  committeemen  enforce  the  rules  and 
regulations,  adjudicate  differences,  and  regulate 
the  admission  of  securities.  They  are  elected 
every  year  by  the  members,  and  they  choose  from 
their  number  a  chairman  and  vice-chairman.  In 
March  of  each  year,  before  retiring  from  office, 
the  committee  elects  all  the  old  Stock  Exchange 
members  who  wish  to  be  re-elected,  membership 
on  the  London  Exchange  being  granted  for  one 
year  only.  Any  member  may  object  to  the  re- 
election of  any  other  member,  but  this  is  a  very 
unusual  incident. 

"The  great  principle  upon  which  the  com- 
mittee acts,"  says  Mr.  Francis  W.  Hirst,  "and 
to  which  most  of  its  regulations  are  di- 
rected, is  the  inviolability  of  contracts.  It 
has  power  to  suspend  or  expel  any  member  for 
violating  its  rules,  or  for  non-compliance  with 
its  decisions,  or  for  dishonorable  conduct.  A 
member  of  the  London  Stock  Exchange  is  pro- 


THE  LONDON  STOCK  EXCHANGE   331 

hibited  from  advertising  or  from  sending  circulars 
to  any  but  his  own  clients.  He  is  also  forbidden 
to  belong  to  any  other  Stock  Exchange,  or  '  bucket- 
shop,'  or  other  competing  institution.  New  mem- 
bers are  now  compelled  to  become  proprietors 
by  acquiring  at  least  one  Stock  Exchange  share, 
paying  a  heavy  entrance  fee  and  an  annual  sub- 
scription of  forty  guineas.  Yet  the  precautions 
against  impecuniosity  are  inadequate.  Defaults 
are  far  too  common."* 

In  such  a  dual  form  of  control  as  that  of  these 
managers  and  committeemen  it  is  obvious  that 
causes  of  friction  must  of  necessity  arise  from 
time  to  time,  and  that  jarring  and  discord  are 
inevitable.  The  owners  or  proprietors  are,  of 
course,  a  minority  of  the  members,  and  their 
decisions  on  matters  that  come  before  them  are 
necessarily  biased  in  favor  of  a  course  that  will 
increase  the  dividends  on  their  shares.  Naturally 
they  would  favor  a  practically  unlimited  member- 
ship, since  the  dividends  are  largely  acquired 
from  this  source. 

The  plan  of  compelling  each  new  member  to 
become  a  shareholder  or  proprietor  was  devised 


*  "The  (London)  Stock  Exchange,"  Francis  W.  Hirst,  London,  Williams 
and  Norgate,  1910.  The  attention  of  the  reader  is  invited  to  this  book. 
As  a  short  study  of  investment  and  speculation  in  England  it  is  exceedingly 
instructive,  doubly  so  in  that  it  comes  from  the  pen  of  the  editor  of  the 
Economist. 


332  THE  STOCK  EXCHANGE  FROM  WITHIN 

to  meet  this  difRculty,  and  in  a  measure  it  has 
succeeded.  "Within  the  course  of  the  next  half 
century,"  says  the  Quarterly  Review,  "  it  Is  pretty 
certain  that  the  Stock  Exchange,  as  a  company, 
will  belong  to  the  members,  of  whom  each  will 
have  a  stake  in  the  enterprise;  and  that  happy 
consummation,  when  it  arrives,  will  put  an  end 
to  a  good  many  minor  problems  which  still 
harass  the  House  in  its  workings,  and  possibly 
check  those  bolder  plans  for  reform  which  are;, 
advocated  by  many  of  the  members."*  The 
difficulties  arising  from  these  causes  had  their 
origin,  as  we  have  seen,  as  far  back  as  the  year 
1801,  when  the  new  building  was  erected.  As 
only  the  wealthier  members  of  the  association  had 
provided  the  capital  for  the  Capel  Court  structure, 
in  order  to  protect  their  investment,  they  de- 
manded control  of  its  financial  affairs;  thus  the 
Stock  Exchange  thenceforth  consisted  of  two 
distinct  bodies,  proprietors  and  subscribers. 

While  there  is  but  one  way  by  which  a  man 
may  become  a  member  of  the  New  York  Stock 
Exchange,  in  the  London  Exchange  there  are 
various  ways.  The  most  direct  way,  and  the 
easiest  but  most  expensive  way,  is  to  pay  an 
entrance  fee  of  500  guineas,  and  find  three  mem- 
bers who  will  stand  surety  for  four  years  for  the 

*  The  Quarterly  Review,  July,  1912. 


THE  LONDON  STOCK  EXCHANGE   ss3 

sum  of  £500  each,  this  £500  being  forfeited  to 
the  estate  if  the  member  is  "hammered"  — i.  e., 
if  he  fails  during  the  period.  The  candidate  must 
in  addition  buy  three  Stock  Exchange  shares,  the 
price  of  which  at  present  is  about  £190  each.* 
He  must  also  purchase  from  a  retiring  member 
a  nomination,  which  can  be  bought  at  present 
for  £40,  although  they  have  sold  as  high  as 
£700.  Candidates  who  wish  to  join  the  Exchange 
under  easier  conditions  may  have  their  entrance 
fees  reduced  to  250  guineas  if  they  have  served 
for  four  years  in  the  Stock  Exchange  as  a  clerk; 
and  for  these  candidates  concessions  are  also  made 
in  respect  to  sureties,  of  which  they  need  provide 
but  two,  and  to  shares,  of  which  they  are  required 
to  buy  but  one  instead  of  three.  The  committee 
is  also  empowered  to  elect  each  year  a  few  candi- 
dates without  nomination. 

This  is  a  rather  curious  practice  which  requires 
a  word  of  explanation.  In  England,  as  elsewhere, 
there  is  a  latent  objection  to  monopolies  of  all 
forms,  and  the  foresighted  governors  of  the 
Exchange,  with  an  eye  to  the  possibility  of  diffi- 
culties that  might  be  raised  against  their  institu- 
tion at  some  time  in  the  future  on  the  ground  of 
monopoly,  hit  upon  this  expedient  as  a  precaution- 
ary measure.     Should  such  objection  be  raised, 

*  There  are  20,000  shares  (£13  paid)  and  £416,700  debentures  outstanding. 


334  THE  STOCK  EXCHANGE  FROM  WITHIN 

the  governors  have  only  to  admit  a  few  more 
members  without  nomination.  The  door  is  thus 
thrown  open;  and  there  is  no  de  facto  monopoly. 
It  is  very  simple  and  very  ingenious. 

In  all  these  cases  the  annual  subscription,  or 
dues,  is  the  same.  These,  which  were  originally 
lo  guineas,  then  20  and  30,  are  now  40  for  all  new 
members,  while  old  members  pay,  of  course,  the 
subscription  prevailing  at  the  time  of  their  elec- 
tion. As  a  condition  precedent  to  election,  a  can- 
didate must  present  himself  before  the  committee 
with  his  sureties,  and  each  of  them  must  give  sat- 
isfactory answers  to  the  questions  put  to  him. 

From  this  it  will  be  seen  that  a  man  who  wants 
to  become  a  member  of  the  London  Stock  Ex- 
change without  first  serving  an  apprenticeship  of 
four  years  as  clerk  must  pay  for  his  entrance  fee 
500  guineas,  his  shares  £570,  his  nomination  £40, 
and  his  annual  dues  40  guineas,  or  a  total  of 
about  £1150,  of  which  £570,  the  price  of  his 
shares,  yields  him  a  return  in  Stock  Exchange 
dividends.  These  shares  are,  of  course,  excellent 
investments,  and  the  managers  may  be  relied 
upon  to  see  to  it  that  their  value  is  not  impaired. 
During  the  first  seventy-five  years  of  its  existence 
Stock  Exchange  shares  paid  an  average  dividend 
of  20  per  cent.;  for  the  last  completed  year  the 
dividend  was  100  per  cent.     No  one  person  may 


THE  LONDON  STOCK  EXCHANGE        335 

hold  more  than  200  shares,  and  holders  must  be 
members  of  the  Exchange  in  all  cases  except  those 
where  representatives  of  proprietors  acquired 
their  shares  before  December  31,  1875.  When  a 
proprietor  dies,  his  shares  must  be  sold  to  a  member 
within  twelve  months.  The  membership  is  not 
limited,  strictly  speaking,  and  whereas  in  1802. 
there  were  500  members,  in  1845  there  were  800, 
in  1877,  2000,  and  in  1910,  5019. 

I  say  the  membership  is  not  limited,  but  when 
the  time  arrives,  as  it  probably  will  within  this 
generation,  that  the  20,000  shares  are  divided  at 
the  ratio  of  three  shares  for  each  member,  6666 
members  will  then  own  all  the  shares  and  the 
membership  will  be  full.  Hence  there  is,  in  a  way, 
a  limit  to  the  total  membership. 

One  important  respect  in  which  the  London 
Stock  Exchange  differs  from  all  others  —  Ameri- 
can, Continental,  or  Provincial  —  is  the  division 
of  its  members  into  two  classes,  jobbers  and 
brokers,  a  division  that  appears  to  be  as  old  as 
the  Exchange  itself.  As  to  which  of  these  classes 
it  is  better  to  belong  there  are  differences  of  opin- 
ion, but  the  wise  men  in  the  business  seem  to  be 
a  unit  in  recommending  a  few  years'  experience 
as  a  broker  to  be  followed  by  the  business  of  the 
jobber.  The  broker,  under  the  London  system, 
deals  with  the  outside  public  and  acts  merely  as 


336  THE  STOCK  EXCHANGE  FROM  WITHIN 

agent  between  the  public  and  the  jobber,  with 
whom  he  trades  on  the  floor  of  the  Exchange. 
The  jobber,  on  his  part,  is  not  allowed  to  deal 
with  the  public  at  all,  but  must  confine  his 
activities  to  the  brokers  and  to  his  fellow  jobbers. 
^'Thus  the  broker,"  as  Mr.  Hirst  puts  it,  "feeds  the 
jobber  much  as  the  solicitor  feeds  the  barrister," 
or,  continuing  the  metaphor,  we  may  say  that 
like  the  barrister  the  jobber  gets  the  cause  celebre 
and  all  the  great  prizes,  and  like  the  solicitor  the 
broker  hunts  up  the  business  and  must  be  content 
with  small  returns.  The  broker  works  for  his 
commission;  the  jobber  for  what  he  can  get  out 
of  the  trade  in  the  way  of  a  profit. 

The  system  in  vogue  in  the  New  York  Stock 
Exchange  would  seem  to  possess  many  advantages 
over  this  curious  division  of  functions  between 
the  two  classes.  Here,  as  every  one  knows, 
brokers  are  not  restricted  in  their  operations; 
the  field  is  alike  open  to  all  members,  and  the 
market  is  not  limited  by  placing  it  in  the  hands  of 
any  one  man  or  any  group  of  men.  On  the  Lon- 
don Exchange  the  attempt  to  define  strict  dividing 
lines  between  brokers  and  jobbers  has  not  been 
successful;  for  years  there  has  been  a  strong 
undercurrent  of  resentment  between  them  because 
of  acts  which  each  regards  as  encroachments  by 
the  other  upon  its  especial  domain. 


THE  LONDON  STOCK  EXCHANGE        33-) 

The  quarrel  reached  an  acute  stage  in  the 
paralysis  that  hit  the  Stock  Exchange  after  the 
South  African  war;  there  were  too  many  members 
and  too  little  business.  Brokers  took  it  upon 
themselves  to  make  prices  and  to  deal  directly 
with  other  brokers  and  with  outsiders,  disregarding 
the  jobbers  altogether;  and  jobbers  in  turn  sought 
in  self-defence  to  establish  connections  of  their 
own,  outside  the  Stock  Exchange,  and  with  non- 
members.  Both  parties  have  violated  the  spirit, 
if  not  the  letter  of  the  Stock  Exchange  rules, 
and  even  at  the  present  time,  when  much  stricter 
rules  have  been  passed  defining  the  limxitations  of 
each  division,  the  same  unfortunate  feeling  of 
resentment  is  heard  daily.  Violations  of  the  rule, 
however  technical,  are  bound  to  create  friction, 
and  friction  among  the  members  of  a  Stock  Ex- 
change is  not  a  good  thing  for  the  members  nor 
for  the  business.  Fortunately,  there  is  nothing 
of  that  sort  in  the  New  York  Exchange. 

In  active  securities  where  there  are  very  many 
transactions,  Mr.  Hirst  is  disposed  to  think  that 
the  separate  existence  of  jobbers  makes  for  a  free 
market  and  close  prices  the  very  essence  of  an 
Exchange's  functions.  This  may  be  true,  since 
the  jobber  is  a  host  in  himself,  specialist,  specu- 
lator, trader  and  jobber  —  all  in  one.  Where 
there  is  a  free  market,  the  presence  of  such  a  par- 


338  THE  STOCK  EXCHANGE  FROM  WITHIN 

ticlpant  undoubtedly  adds  to  It,  as  any  one  knows 
who  has  dealt  with  him  in  lots  of  from  5,000  to 
10,000  shares,  at  a  difference  of  only  a  sixteenth. 
Such  a  market  is  a  close  market  in  excelsis. 
But  in  the  ^New  York  Stock  Exchange  the  same 
result  is  obtained  far  more  openly  and  above- 
board  by  the  presence  in  all  active  securities  of 
a  host  of  such  jobbers  —  brokers,  traders,  special- 
ists, and  speculators  —  each  actively  bidding  and 
offering  by  voice  and  gesture,  and  without  col- 
lusion, and  each  thereby  contributing  to  the 
making  of  the  freest  possible  market  and  the 
closest  possible  price.  In  New  York  no  middle- 
man stands  between  the  public  and  the  market. 
It  is  a  fact  recognized  by  all  economists  that  the 
larger  the  number  of  dealers  and  the  freer  the 
competitive  bidding,  the  more  accurate  the  result- 
ant ■  price  and  the  nearer  its  approach  to  true 
value;  hence  it  would  seem  to  follow  that  in  this 
highly  desirable  attainment  the  New  York  system 
is  superior  to  that  of  London.  The  same  comment 
applies  to  the  market  for  inactive  securities.  In 
London,  notwithstanding  the  quotations  printed 
in  the  Official  List,  the  public  has  no  assurance 
that  jobbers  can  be  found  to  deal  at  those  prices, 
or  at  prices  approaching  them.  "And  when  there 
is  a  slump  in  the  market  and  a  rush  of  selling 
orders  with  no  support,"  as  Mr.  Hirst  candidly 


THE  LONDON  STOCK  EXCHANGE   339 

admits,  "as  happened  in  rubber  shares  in  the 
months  of  June  and  July,  1910,  the  jobbers  are  apt 
to  be  away  at  lunch  all  day,  and  the  brokers  have 
to  report  to  their  clients  that  they  simply  cannot 
find  a  purchaser."* 

Such  things  do  not  happen  in  the  New  York 
Exchange,  for  when  there  is  a  slump  in  any  group 
of  shares,  instantly  there  gathers  a  number  of 
individuals  who  are  there  for  the  very  purpose 
of  making  a  market.  It  may  be  a  "soft"  market, 
with  wide  fluctuations,  but  it  is  a  market  for  all 
that,  and  the  timely  absence  at  an  all-day  luncheon 
of  any  one  man  or  any  group  of  men  cannot  pos- 
sibly affect  it.  There  have  been  occasions  on  the 
New  York  Stock  Exchange,  no  doubt,  where  a 
broker  with  a  "hurry"  order  in  a  very  inactive 
security  has  not  found  a  market  awaiting  him, 
but  there  are  various  ways  by  which  he  may 
seek  the  desired  market  and  ultimately  he  is  sure 
to  find  it.  In  any  case  such  an  incident  is  the 
exception  that  proves  the  rule  that  a  free  market, 
affording  all  the  advantages  which  excellent 
markets  possess,  is  nowhere  to  be  found  more 
easily  and  more  quickly  than  on  the  floor  of  the 
New  York  Stock  Exchange.  "American  securi- 
ties," says  the  Paris  correspondent  of  the  Journal 


*  It  should  be  said,  in  fairness  to  the  London  jobber,  that  the  incident 
here  mentioned  by  Mr.  Hirst  is  a  rare  exception. 


340  THE  STOCK  EXCHANGE  FROM  WITHIN 

of  Commerce  in  his  cabled  despatches  of  October 
23,  1912  —  referring  to  the  Balkan  crisis  in  that 
city  —  "may  with  complete  conservatism  be 
regarded  as  having  received  a  splendid  advertise- 
ment in  the  French  market  by  reason  of  their 
recent  remarkable  instantaneous  conversion  into 
cash." 

In  the  course  of  many  years  of  active  experi- 
ence as  broker,  trader,  and  speculator,  I  do  not 
now  recall  an  instance  in  which  I  was  unable  to 
find  a  market  on  the  New  York  Exchange  for 
any  security,  however  inactive,  which  I  wished 
to  buy  or  sell.  If  the  specialist  in  this  particular 
stock  cannot  satisfy  me  with  his  quotation,  there 
are  always  room  traders  to  whom  I  may  submit 
my  offer;  there  are  also  arbitrageurs,  wire  houses, 
and  banking  houses  interested  in  this  particular 
seciirity.  Somewhere  among  all  these  agencies 
the  New  York  broker  must  inevitably  find  or 
create  a  market.  But  I  fancy  he  would  have  a 
sorry  time  of  it  were  he  restricted,  under  the 
rules,  to  dealing  with  a  jobber  who  "is  apt  to  be 
away  at  lunch  all  day,"  when  trouble  comes  and 
risks  are  involved. 

Such  a  system,  it  would  seem,  is  all  very  well 
for  the  jobber,  but  quite  unfair  to  the  outsider 
and  to  the  conscientious  broker  who  is  striving 
all  the  while  to  protect  the  interests  of  the  public 


THE  LONDON  STOCK  EXCHANGE   341 

and  maintain  the  welfare  of  the  Exchange.  In- 
deed, as  it  works  out  in  London,  the  broker  has 
all  the  worst  of  it  in  many  ways.  Even  though 
the  jobber  *'runs  a  book,"  as  the  phrase  is,  his 
work  is  done  at  4  p.  m.  —  when  the  market 
closes  —  and  if  he  is  not  doing  a  large  business 
he  may  then  follow  his  inclinations.  Unless  his 
business  involves  dealing  in  South  Africans  or 
Americans,  his  work  is  substantially  completed 
with  the  official  closing  of  the  Exchange.  But 
the  broker,  on  the  other  hand,  enjoys  no  such 
freedom.  After  the  closing  he  must  go  to  his 
office  —  for  in  the  nature  of  things  he  must 
have  one  —  and  there  he  will  find  correspondence 
awaiting  him,  orders  to  be  executed  in  the  "Street 
markets,"  and  telephone  messages  to  send  to  his 
customers.  The  mere  fact  that  a  London  broker 
must  use  the  London  telephone  is  in  itself  a  curse, 
for  nowhere  under  the  canopy  is  there  a  telephone 
service  so  dreadful  and  so  exasperating. 

Even  in  the  ebb-tide  of  a  dwindling  summer 
business  the  London  broker,  who  cannot  begin 
his  day's  correspondence  until  four,  finds  it 
difficult  to  leave  his  ofiice  until  an  hour  long  after 
his  American  colleague  has  played  his  eighteen 
holes  or  dressed  for  dinner.  Aside  from  the  hor- 
rors of  the  telephone  service,  this  is  due  in  a  meas- 
ure   to    the    fact   that    they    have    no    ticker    in 


342  THE  STOCK  EXCHANGE  FROM  WITHIN 

London  and  the  mechanical  efficiency  with  which 
this  machine  faithfully  records  all  over  America 
each  fluctuation  of  the  market,  finds  no  counter- 
part in  England.  The  broker  in  London  has 
therefore  to  perform,  in  a  measure,  the  work 
of  the  ticker  in  New  York.  Perhaps  I  should  not 
say  they  have  no  tickers  in  London.  In  point 
of  fact  there  is  such  an  instrument,  identical  with 
our  own,  which  four  or  five  times  a  day,  at  stated 
intervals,  reels  off'  with  mechanical  monotony  a 
list  of  quotations  in  certain  active  securities  — 
the  same  group  every  day.  They  are  limited  in 
number,  almost  nobody  looks  at  them,  and  many 
really  enterprising  houses  do  not  install  them 
at  all. 

Worst  of  all,  the  London  broker  until  very 
recently  was  not  properly  paid  for  his  work;  he 
was  not  protected  by  a  rigorous  commission  law, 
as  we  are  in  the  New  York  Exchange.  In  New 
York  a  broker  charges  |  per  cent,  commission 
on  the  par  value  of  every  hundred  shares  in 
which  he  deals  for  a  non-member,  each  way, 
and  the  rules  of  the  Exchange  compel  him  to 
collect  it  in  all  cases.  The  slightest  departure 
from  this  rule,  however  technical  it  may  be,  is 
severely  punished,  and  no  statute  of  limitations 
or  other  expedient  will  save  him  from  the  conse- 
quences of  it.     Thus  all  the  brokers  are  insured 


THE  LONDON  STOCK  EXCHANGE   343 

an  equal  footing;  competition  for  business  is 
prevented,  and  the  public  which  the  Exchange 
seeks  to  serve  is  assured  of  equally  fair  dealing 
in  every  quarter.  So  rigorously  is  this  rule 
enforced  that  the  large  and  important  branch  of 
the  Exchange's  business  which  has  to  do  with 
joint-account  trading  between  New  York  and 
foreign  centres  has  recently  been  seriously  re- 
stricted because,  in  the  judgment  of  the  governors, 
it  involved  an  infraction  of  this  Important  com- 
mission law. 

On  May  22nd  of  this  year  (191 2)  the  London 
Stock  Exchange  put  into  effect  an  official  scale 
of  commissions,  which  was  designed  to  remedy 
the  unfortunate  conditions  that  had  prevailed, 
and  this  scale  is  now  enforced.  It  provides  for 
a  charge  of  |  per  cent,  on  British  government 
securities,  Indian  government  stocks  and  foreign 
government  bonds;  j  per  cent,  on  certain  other 
special  cases,  |  In  railroad  ordinary  and  de- 
ferred ordinary  stocks  at  prices  of  £50  or  under, 
and  a  sliding  scale  on  shares  transferable  by 
deed,  ranging  from  commissions  of  i|d.  per  share 
to  2s.  6d.  per  share.  On  American  shares  the  com- 
mission to  be  charged  is  6d.  per  share  on  a  price 
of  ^25  or  under,  gd.  on  prices  from  $25  to  $50,  is. 
on  prices  from  ^50  to  ^100,  is,  6d.  on  prices  from 
^100  to  ^150;  and  2s.  on  prices  over  $200. 


344  THE  STOCK  EXCHANGE  FROM  WITHIN 

In  many  other  transactions  the  commission 
to  be  charged  is  left  to  the  discretion  of  the 
broker  who  may,  if  he  is  doing  a  large  business 
with  a  client  in  high-priced  and  low-priced  shares 
on  which  the  official  scale  of  commission  varies 
arrange  to  charge  |  on  all  transactions,  regardless 
of  the  rules.  Whatever  the  London  broker  may 
lose  in  the  quality  of  his  commissions  as  compared 
with  the  New  York  broker  appears,  however, 
to  be  compensated  by  their  quantity.  A  firm 
of  jobbers  of  my  acquaintance  once  handled 
in  a  single  day  262,000  shares  of  "Americans  " 
alone,  and  when  It  is  borne  in  mind  that  this 
was  but  one  of  perhaps  150  firms  doing  a 
similar  business,  an  Idea  may  be  gained  as  to 
how  London  brokers  and  jobbers  contrive  to 
keep  the  wolf  from  the  door. 

The  system  of  settlements  twice  a  month  as 
employed  in  London  Is  another  method  quite 
different  from  that  employed  in  New  York,  and 
one,  too,  that  seems  to  suffer  by  comparison  with 
our  system.  On  the  New  York  Stock  Exchange 
everything  is  settled  on  the  day  following  the 
transaction.  Each  broker  and  each  customer 
knows  just  where  he  stands,  and  every  trade  is 
settled  In  full  when  the  next  day  ends.  Tell  an 
English  broker  that  on  a  single  day  our  Clearlng- 
House  settled  and  balanced  transactions  In  more 


THE  LONDON  STOCK  EXCHANGE   345 

than  3,000,000  shares  of  an  approximate  value 
of  50,000,000  sterling  and  he  gasps.  He  says 
that  such  a  thing  would  be  impossible  in  London, 
and  he  is  right,  it  would  be  impossible  indeed. 
Clearings  in  London  vastly  exceed  ours,  but  they 
do  not  occur  daily;  indeed  our  system  would  not 
do  at  all  in  a  centre  that  transacts,  as  London 
does,  a  large  international  business  in  which 
transfers  must  be  sent  hourly  to  Egypt  and  India 
and  to  all  quarters  of  the  globe.  Daily  clearings 
in  such  circumstances  would  be  very  troublesome 
and  vexatious. 

The  New  York  system,  however,  makes  failures 
and  defaults  commendably  rare,  while  the  London 
system,  by  postponing  the  day  of  reckoning, 
actually  invites  over-extensions  in  speculation 
leading  to  failures  that  could  not  possibly  occur 
here.  To  make  this  point  clear  to  the  layman  it 
may  be  said  concisely  that  the  man  who  settles 
dally  Is  In  a  safer  position  both  toward  himself 
and  his  creditors  than  Is  the  man  who  postpones 
his  settlement.  The  daily  settlement  protects  the 
public,  as  well,  by  putting  limits  on  speculative 
commitments.     These  matters  are  self-evident. 

A  gentleman  who  was  for  many  years  identified 
with  a  London  firm  of  jobbers,  and  who  Is  now  a 
member  of  the  New  York  Stock  Exchange  and, 
therefore,  quite  familiar  with  the  different  methods 


346  THE  STOCK  EXCHANGE  FROM  WITHIN 

employed  in  these  Exchanges,  tells  me  that  the 
London  system  of  brokers  and  jobbers,  commis- 
sion laws,  and  fortnightly  settlements,  is  the  best 
possible  system  for  the  London  Exchange,  while 
the  very  different  methods  employed  in  New 
York  seem  to  him  to  be  the  best  that  can  be 
devised  for  the  New  York  Exchange.  This  may 
be  true,  since  conditions  governing  the  two 
markets  are  widely  different.  In  New  York  the 
whole  system  is  cash;  in  London,  credit.  Here 
brokers  may  accept  business  with  considerable 
freedom,  knowing  that  but  a  single  day  elapses 
before  the  reckoning;  in  London  brokers  exercise 
greater  caution  because  they  must  trust  their 
clients  until  settlement  day. 

Another  point  of  difference  between  the  methods 
of  the  two  Exchanges  lies  in  the  phlegmatic  deliber- 
ation of  the  Englishman.  Here  in  New  York 
there  is  a  slap  dash,  touch-and-go  system  that  is 
greatly  facilitated  by  the  use  of  the  telephone  and 
the  private  telegraph  lines;  a  single  commission 
house  has  10,000  miles  of  leased  lines.  In  London, 
where  telephones  and  private  lines  are  but  spar- 
ingly used  by  brokers  and  clients,  a  broker  often 
finds  on  his  desk  in  the  morning  three  or  four  hun- 
dred letters  and  telegrams.  The  care  and  atten- 
tion required  to  handle  an  enormous  lot  of  orders 
given  in  this  deliberate  manner  is  something  with 


THE  LONDON  STOCK  EXCHANGE   347 

which  New  York  stockbrokers  are  quite  unfamiliar; 
indeed  it  may  be  doubted  if  they  could  meet 
such  an  emergency  with  their  present  facilities. 

Publicity,  as  we  are  learning  in  the  New  York 
Stock  Exchange,  is  a  prime  requisite  of  the  business, 
and  the  advantages  that  thus  accrue  through  the 
use  of  the  ticker  and  the  published  summary  of 
each  transaction  in  the  day's  work  cannot  be 
overestimated  in  its  importance  to  the  public 
and  to  the  banks.  In  London,  where  a  jobber  may 
buy  or  sell  large  quantities  of  securities,  the 
business  is  -done  quietly.  Outside  of  the  active 
participants  in  a  transaction,  nobody  is  per- 
mitted to  know  anything  about  it.  There  is  no 
ticker  service  worthy  of  the  name,  nor  is  there  a 
list  of  transactions  published  at  the  end  of  the 
day. 

This,  it  seems  obvious,  would  not  do  at  all  in 
America.  We  have  here  not  only  the  ticker-tape, 
which  prints  an  almost  instantaneous  report  of 
prices  all  over  the  country,  together  with  the 
volume  of  business  done  at  those  prices,  but  there 
are  similar  reports  of  the  day's  business  printed 
in  all  the  morning  and  evening  papers  —  one 
of  the  last-named  going  so  far  as  to  reproduce 
on  its  financial  page  a  copy  of  the  day's  tape 
from  beginning  to  end.  All  the  newspapers,  more- 
over, print  opening,  high,  low,  and  closing  prices, 


348  THE  STOCK  EXCHANGE  FROM  WITHIN 

together  with  the  bid  and  offered  price  of  each 
security  at  the  market's  close. 

In  the  course  of  the  two  days  in  which  these 
lines  are  written,  for  example,  257,000  shares  of 
Reading  Railroad  stock  have  changed  hands 
within  a  range  of  if  per  cent.  The  public  is 
enabled,  through  the  medium  of  the  news-ticker, 
to  learn  who  the  buyers  and  sellers  were  that 
engaged  In  these  transactions;  the  tape  shows  the 
specific  volume  of  business  done  at  each  fraction, 
the  various  news  agencies  contain  all  the  infor- 
mation and  gossip  that  throws  any  light  on  the 
matter,  and  the  financial  columns  of  the  morning 
and  evening  newspapers  comment  freely  for  the 
public  benefit. 

The  total  amount  of  information  that  is  thus 
laid  before  the  public  is  as  complete  and  as  in- 
structive as  could  be  desired,  and  yet  in  London 
and  on  the  Continent  such  information  is  never 
published,  although  the  two  leading  financial 
newspapers  In  London,  because  of  the  immense 
field  covered,  actually  publish  a  mass  of  miscella- 
neous news  and  gossip  that  exceeds  any  similar 
American  effort.  They  make  It  pay,  too;  divi- 
dends declared  by  these  newspapers  are  alto- 
gether unapproached  by  the  American  financial 
press.  The  essential  information  lacking,  how- 
ever, is  the  number  of  shares  dealt  in,  and  at  what 


THE  LONDON  STOCK  EXCHANGE   349 

prices;  even  If  they  had  a  thoroughly  good  ticker 
system  I  doubt  if  this  information  could  be 
recorded,  because  the  volume  of  business  done  Is 
too  great.  It  is  'encouraging  in  this  connection 
to  note  that  so  eminent  an  economist  as  M. 
Leroy-Beaulieu  frankly  concedes  our  superiority 
In  these  matters  over  the  practice  of  the  foreign 
Exchanges  and  urges  their  Immediate  adoption 
abroad.* 

The  second  serious  objection  that  may  fairly 
be  lodged  against  the  London  system  applies, 
as  I  have  said,  to  the  Increased  Inducements  offered 
to  foolhardy  and  reckless  speculation  by  the  plan 
of  deferred  settlements.  Whether  members  of 
the  various  Stock  Exchanges  in  the  world's 
capitals  like  It  or  not,  they  must  recognize  the  fact 
that  there  are  evils  In  speculation  just  as  there 
are  benefits,  and  that  these  evils  are  becoming  a 
subject  of  Increasing  comment.  The  recent  at- 
tempt to  repress  speculation  In  Germany  and 
the  conditions  which  led  to  the  appointment  of 
the  Hughes  Committee  in  New  York  are  signs 
of  an  aroused  public  sentiment  that  cannot  be 
Ignored. 

With  these  examples  before  them,  members 
of  Exchanges  everywhere  must  realize  that  if  it 
lies    within    their  power   to    discountenance   and 

*  U Economiste  Francais,  Paris,  October  S,  1912. 


350  THE  STOCK  EXCHANGE  FROM  WITHIN 

discourage  foolhardy  ventures  into  speculation 
by  persons  ill-equipped  to  undertake  them  it  is 
their  plain  duty  to  do  so.  The  London  Stock 
Exchange's  system  of  fortnightly  settlements 
clearly  does  not  aim  at  this  highly  desirable 
object  as  well  as  the  method  of  daily  settlements 
employed  in  New  York,  for  it  requires  no  student 
to  see  that  by  postponing  the  settlement  risks 
will  be  incurred  that  would  be  impossible  if  a 
reckoning  were  called  for  each  day.  Moreover, 
the  fact  that  there  are  ten  failures  on  the  London 
Stock  Exchange  to  one  in  New  York  furnishes 
ample  proof  that  the  precautionary  restriction 
imposed  by  daily  settlements  is  quite  as  important 
to  the  welfare  of  brokers  as  it  is  to  the  protection 
of  the  public. 

As  a  matter  of  fact,  failures  of  brokerage  houses 
are  peculiarly  abhorrent  to  every  one  concerned. 
In  the  Paris  Bourse  a  broker  must  give  security 
at  ^50,000,  and  his  bankruptcy  in  all  cases  is 
considered  a  fraudulent  one,  rendering  him  liable 
to  arrest.  The  French  Agents  de  Change  enjoy 
an  absolute  government  monopoly,  and  naturally 
in  the  circumstances  they  are  held  to  the  strictest 
accountability;  but  aside  from  that  a  tendency 
is  plainly  discernible  nowadays  In  all  large 
financial  centres  to  demand  of  stockbrokers  on 
the  Exchange  a  rigid  adherence  to  such  business 


THE  LONDON  STOCK  EXCHANGE   351 

methods  as  will  prevent  bankruptcies  of  dealers 
to  whom  the  public  entrusts  Its  money. 

The  danger  of  the  London  fortnightly  settlement 
system  lies  not  In  the  deferred  delivery  of  securi- 
ties, but  in  the  fortnightly  settlement  of  "differ- 
ences." A  London  broker  may  be  actually 
bankrupt,  yet  If  he  Is  desperate  or  unscrupulous, 
knowing  that  his  differences  will  not  have  to  be 
settled  for  a  fortnight,  he  may  plunge  Into  specu- 
lative risks  fraught  with  the  utmost  danger.  If 
the  market  goes  his  way  he  is  saved;  If  it  goes 
against  him,  he  is  still  no  more  than  bankrupt. 
But  in  his  fall,  as  a  result  of  this  dishonest  venture, 
he  may  conceivably  ruin  many  others,  and  a  chain 
of  disasters  may  follow  his  excesses.  It  should 
be  said  in  this  connection  that  London  jobbers 
and  brokers  keep  a  sharp  watch  on  each  other; 
it  is  extraordinary  how  quickly  the  news  gets 
about  if  this  man  or  that  is  over-extended. 
Again,  either  broker  or  jobber  may  discriminate 
in  his  dealings,  taking  care  to  avoid  those  against 
whom  there  is  a  suspicion. 

Notwithstanding  the  points  of  merit  in  the 
New  York  system,  at  some  time  in  the  future 
when  local  Stock  Exchange  business  has  expanded 
to  proportions  approaching  those  of  the  London 
Exchange,  modifications  must  be  made.  If  banks 
and  brokerage  houses  are  given  a  week  or  ten  days 


352  THE  STOCK  EXCHANGE  FROM  WITHIN 

to  settle  transactions,  everybody  will  have  a 
tolerably  clear  Idea  of  what  money  will  be  required, 
and  lenders  will  be  enabled  to  make  provision. 
London  passed  through  the  1907  panic,  under 
this  arrangement,  with  a  maximum  rate  of  7 
per  cent.,  while  we  in  New  York  would  have 
been  glad  to  pay  200  per  cent.,  and  this,  despite 
our  deplorable  currency  system,  could  not  have 
occurred  had  there  been  ample  time  for  the  banks 
to  make  preparations. 

From  these  observations  it  may  be  suggested 
that  perhaps  the  time  will  come  when  the 
governors  of  the  New  York  Stock  Exchange 
may  find  .  it  necessary  to  put  in  force  a 
combination  of  daily  settlement  of  differences, 
such  as  we  have  at  present,  with  a  periodical 
delivery  of  stock  such  as  they  have  in  London. 
Transactions  for  cash  need  not  be  affected  by 
this  arrangement,  nor  would  the  public  lose  any 
of  the  protection  it  now  enjoys.  In  any  case, 
if  such  a  plan  resulted  in  minimizing  those  violent 
fluctuations  in  our  call-money  market  which 
have  so  long  afflicted  us,  it  would  prove  a  per- 
manent blessing. 

As  there  is  no  currency  system  anywhere  in  the 
civilized  world  so  crude  and  inadequate  as  that 
of  the  United  States,  it  is  unnecessary  to  say  that 
London  jobbers  and  brokers  experience  none  of 


THE  LONDON  STOCK  EXCHANGE   353 

the  difficulties  with  money  markets  that  occur 
periodically  on  this  side.  The  carry-over  on  the 
other  side  of  the  water  is  frequently  a  matter 
involving  immense  sums  of  money,  but  rates 
fluctuate  normally  and  are  in  large  measures  gov- 
erned by  automatic  processes  both  simple  and 
sane.  Perhaps  the  less  said  about  similar  condi- 
tions here  the  better.  The  spectacle  presented  by 
strong  and  solvent  houses  ransacking  the  street 
for  funds  secured  by  prime  collateral  and  bidding 
25,  50,  and  even  100  per  cent,  for  accommodation 
■ —  something  that  has  occurred  within  the  last 
decade  and  may  conceivably  occur  again  —  is  one 
upon  which  the  candid  American  observer  does 
not  care  to  dwell;  such  a  man  may  well  look  with 
longing  and  envy  to  London,  where  capital,  credit, 
and  currency  are  so  firmly  established  that  the 
Bank  of  England  dominates  and  controls  all  the 
money  markets  and  gold  movements  of  the  world, 
lending  freely  at  home  and  abroad  whenever  funds 
are  needed,  and  acting  as  a  civilizing  force  in 
supplying  with  British  funds  the  commercial  needs 
of  all  new  countries. 

In  this  connection  we  may  point  out  the  method 
of  borrowing  from  the  banks  the  funds  required 
to  carry  speculative  commitments  in  London. 
It  was  formerly  the  practice  for  the  banks  to  lend 
large  sums  to  brokers,  who  employed  the  money 


354  THE  STOCK  EXCHANGE  FROM  WITHIN 

inside  the  house  in  carrying  over  the  accounts  of 
their  clients.  This  class  of  business  is  still  large, 
but  nowadays  clients  are  not  always  satisfied  to 
borrow  through  brokers,  and  not  infrequently  they 
go  direct  to  the  banks  and  borrow  from  them. 
This  has  the  effect  of  disguising  the  real  character 
of  the  business.  To  all  appearances  the  securities 
have  been  bought  and  paid  for,  and  the  trade 
seems  to  be  an  investment,  but  the  client  has, 
as  a  matter  of  fact,  "pawned"  the  security  with  a 
bank. 

This  practice  is  Inconvenient  In  a  way,  be- 
cause where  the  jobbers  In  Important  markets 
formerly  compared  notes  at  each  settlement  and 
were  thus  enabled  to  form  a  pretty  good  Idea  of 
the  condition  of  the  speculative  account.  It  Is  less 
easy  to  do  so  nowadays,  when  so  many  clients 
carry  on  their  own  borrowing.  A  similar  tendency 
on  the  part  of  the  public  Is  noticeable  in  New 
York,  although,  of  course,  the  daily  settlement  on 
this  side  obviates  the  necessity  for  arriving  at 
conclusions  In  advance  as  to  the  requirements  of 
funds. 

A  word  should  be  said  about  the  methods  of 
London  stockbrokers  In  carrying  stocks  for  their 
customers,  because  this  also  is  quite  different  from 
the  practice  In  New  York.  Here  the  strongest 
houses    rarely   loan    stocks,    unless    attracted    by 


THE  LONDON  STOCK  EXCHANGE   355 

unusual  rates  of  interest;  In  London  it  is  the 
common  practice  of  even  the  best  houses  to 
carry-over,  or  as  we  term  it,  loan,  a  great  part 
of  the  commitments  entered  into  during  the 
account.  One  reason  for  this  is  that  in  London 
customers  buy  their  stocks  outright  more  fre- 
quently than  is  done  here.  Scalping  small  profits 
is  not  practised  on  anything  like  the  New  York 
scale.  Most  of  the  stocks  dealt  in  do  not  pass 
from  hand  to  hand  like  American  stocks,  but 
must  have  a  transfer  form  with  the  name  and 
address  of  the  buyer  and  seller  attached  to  the 
certificate.  There  is  also  a  government  stamp- 
tax  of  ^  per  cent,  on  the  money  involved,  which 
tax  must  be  paid  by  the  buyer  when  the  stock 
is  transferred  to  him.  When  the  buyer  sells  this 
stock  he  may  not  have  immediate  use  for  the 
proceeds,  and  so,  instead  of  delivering  the  stock 
standing  in  his  name,  he  instructs  his  broker  to 
borrow  it  from  account  to  account,  thus  receiving 
interest  on  his  money.  The  tax  is  a  heavy  one  — 
figured  in  American  money  it  amounts  to  ^50  per 
hundred  shares  at  par  —  and  the  Englishman  very 
naturally  resorts  to  methods  such  as  these  to  recoup 
at  least  a  part  of  it. 

Again,  from  the  stockbroker's  point  of  view,  if 
he  buys  securities  on  margin  for  a  customer,  he 
(the    broker)    must   either   carry   them   with   the 


356  THE  STOCK  EXCHANGE  FROM  WITHIN 

jobber  or  with  another  broker,  or  he  will  have 
to  pay  the  government  tax  himself.  Naturally 
he  hastens  to  loan  them,  because,  should  the 
client  sell  the  securities  in  the  course  of  the 
next  account  when  they  would  have  to  be  de- 
livered, the  broker  would  lose  the  tax.  He 
avoids  this  loss  by  instructing  a  jobber  to  con- 
tango or  carry-over  the  securities  until  the  fol- 
lowing account  day.  On  the  other  hand,  if  the 
broker  is  certain  that  his  client  has  purchased 
his  securities  for  a  long  pull  on  a  margin  basis, 
he  will  often  pay  for  the  stock  himself,  transfer 
it  to  his  own  name,  and  willingly  submit  to  the 
government  tax,  knowing  that  he  can  recover  the 
outlay  from  the  handsome  rate  of  interest  charged 
the  client. 

Another  vital  point  of  difference  between  the 
London  and  the  New  York  Stock  Exchange  lies 
in  the  nature  and  volume  of  the  business  done. 
Americans  are  prone  to  think  of  their  foremost 
Exchange  as  one  which,  in  the  volume  and  extent 
of  its  transactions,  compares  favorably  with  the 
great  Bourses  of  the  world;  they  like  to  think 
of  New  York  as  the  financial  centre  of  the  universe, 
and  they  paint  rosy  pictures  of  America  as  a 
great  creditor  nation.  But  they  err  in  each  of 
these  ambitious  dreams.  The  New  York  Stock 
Exchange,  with  all  its  magnitude,  cannot  compare 


THE  LONDON  STOCK  EXCHANGE        357 

with  its  London  prototype;  New  York  is  by  no 
means  the  financial  centre  of  the  world,  and 
America  is  not  a  creditor,  but  a  debtor  nation. 

Perhaps  in  time  America's  relationship  to  Eng- 
land and  to  the  rest  of  the  world  may  change  in 
these  matters  —  certainly  its  increase  in  per  capita 
wealth  and  real  property  is  such  as  to  justify 
the  hope  —  but  at  present  the  day  when  we  may 
speak  of  American  financial  supremacy  seems  a 
long  way  off.  We  have  not  yet  forgotten,  for  ex- 
ample, the  panic  of  1907,  and  our  helpless  situation 
as  revealed  by  our  demand  for  gold,  nor  are  we 
likely  soon  to  forget  the  funds  that  were  then 
promptly  supplied  us  by  London  without  any 
dangerous  depletion  of  the  Bank  of  England's 
reserve.  So  smoothly,  so  automatically  are  these 
large  affairs  conducted  by  the  Bank  that  the 
outflow  of  gold  to  New  York  found  a  prompt 
response  in  the  inflow  from  twenty-four  countries, 
including  the  Colonies.  Within  six  weeks  after 
the  American  drain  began,  the  bank's  stock  of 
bullion  actually  exceeded  its  original  store.  Small 
wonder  that  Englishmen  are  proud  of  their  bank; 
and  that  London  should  have  become  the  world's 
centre  for  the  investment  of  capital  and  the  diffu- 
sion of  credit. 

The  New  York  Stock  Exchange  business  differs 
radically  from  that  of  all  other  great  Exchanges 


358  THE  STOCK  EXCHANGE  FROM  WITHIN 

in  the  one  respect  that  its  dealings  are  practically 
confined  to  home  corporations,  whereas  the 
Bourses  in  Paris  and  Berlin,  and  more  particularly 
the  Stock  Exchange  in  London,  embrace  in  their 
daily  lists  securities  representing  many  different 
countries  all  over  the  world.  Here  we  have 
Canadian  Pacific  Railway  shares,  and  various 
Mexican  Railway  securities,  together  with  some 
issues  of  Japanese  and  German  bonds,  London 
Underground  Railway  bonds,  and  a  -few  others. 
But  these,  with  the  exception  of  Canadians,  are 
dealt  in  sparingly  and  with  a  rather  nominal 
market.  Our  list  of  securities  is  composed  almost 
entirely  of  home  rails  and  industrials  companies, 
representing,  to  be  sure,  an  enormous  total  of 
capital  investment  and  signifying  the  tremendous 
growth  of  a  comparatively  new  country  backed 
by  the  energies  of  a  thrifty  and  enterprising 
people,  but  compared  with  the  London  Stock 
Exchange's  Daily  Official  List  ours  is  meagre  in 
the  extreme. 

The  London  Daily  List  covers  sixteen  pages 
as  large  as  our  daily  newspapers,  each  page 
printed  closely  in  small  type,  and  containing  the 
names,  amounts,  interest  dates,  rates  of  dividend, 
and  occasional  quotations  of  approximately  4700 
different  listed  securities.  This  long  list,  more- 
over, contains  the  names  only  of  the  securities 


THE  LONDON  STOCK  EXCHANGE   359 

that  have  received  an  official  settlement  and  an 
official  quotation  as  well.  There  are  certainly 
as  many  more  securities  dealt  in  that  have  not 
received  an  official  quotation  and  hence  are  not 
permitted  to  appear  in  the  List,  so  that  the  total 
number  of  different  securities  represented  on  the 
London  Exchange  in  one  or  both  of  these  ways 
probably  exceeds  9000,  half  of  them  occupying 
a  position  somewhat  similar  to  the  Unlisted 
Department  which  once  had  a  place  on  the  New 
York  Stock  Exchange,  but  which  is  now  abolished. 
It  is  the  largest  and  most  varied  list  of  securities 
in  the  world.  The  price  of  a  single  copy  is  six- 
pence; it  is  published  by  the  trustees  and  mana- 
gers, under  the  authority  of  the  committee. 
Not  the  least  interesting  feature  of  the  List  is  its 
continued  expansion  in  the  last  half-century. 
Up  to  the  year  1867  one  page  sufficed,  then  four 
till  1889,  eight  till  1900,  twelve  till  1902,  and 
sixteen  thereafter,  this  expansion  closely  following 
the  nominal  value  of  the  securities  quoted,  which 
were  £5,480,000,000  in  1885  and  £10,200,000,000 
in  1909.  The  latter  figure  is  about  equal  to  the 
combined  nominal  capital  value  of  the  securities 
quoted  on  the  Paris  Bourse  and  the  New  York 
Stock  Exchange.  In  1907  the  total  number  of 
bonds  then  listed  on  the  New  York  Stock  Ex- 
-hange  was   1 100,  and  the  total  number  of  stocks 


36o  THE  STOCK  EXCHANGE  FROM  WITHIN 

502,  these  together  representing  a  total  par  value 
of  ^21,079,620,430,  In  1912  this  total  amounted 
to  1,028  bonds  and  555  stocks,  with  an  aggregate 
par  value  of  $26,243,291,803. 

The  London  List  is  conveniently  divided  into 
thirty-eight  different  classes,  among  them  British 
Funds,  Corporation  and  County  Stocks  of  the 
United  Kingdom,  Public  Boards,  Colonial  and 
Provincial  Government  Securities,  Indian  and 
Colonial  and  Provincial  Government  Securities, 
Indian  and  Colonial  Corporation  Stocks,  Foreign 
Corporation  Stocks  and  Bonds,  Ordinary  Shares 
and  Stocks  of  English  Railways,  Railways  leased 
at  fixed  rentals.  Railway  Debenture  Stocks  and 
Guaranteed  Stocks  and  Shares,  together  with 
preference  shares,  Indian  Railways,  Indian  Native 
Raj  and  Zemindary  loans.  Railways  in  British 
pos-sessions,  American  Railroad  Stocks  and  Bonds, 
Securities  of  Foreign  Railways,  Banks  and 
Discount  Companies,  Breweries  and  Distilleries, 
Canals  and  Docks,  Miscellaneous  Commercial  and 
Industrial  Companies,  Electric  Lighting  and 
Power  Companies,  Financial,  Land,  and  Invest- 
ment Companies,  Financial  Trusts,  Gas  Com- 
panies, Insurance  Companies,  Iron,  Coal,  and 
Steel  Companies,  Mines,  Nitrates,  Shipping,  Tea, 
Coffee  and  Rubber,  Telegraphs  and  Telephones, 
Tramways  and  Omnibus,  and  Water  Works.     Of 


THE  LONDON  STOCK  EXCHANGE   361 

these  the  Commercial  and  Industrial  Companies 
List  is  by  far  the  largest,  covering  three  pages. 
A  cursory  glance  over  this  really  formidable 
Official  List  brings  forcibly  to  mind  London's 
supreme  position  as  banker,  broker,  and  clearing 
house  for  the  wide  world,  while  it  emphasizes  the 
constantly  increasing  overflow  of  British  capital 
into  channels  that  make  for  enterprise  and  devel- 
opment even  in  the  most  remote  quarters  of  the 
globe.  Here  we  find  set  forth  Ceylon,  Fiji, 
Tasmania,  and  Cape  of  Good  Hope  debentures; 
Stocks  of  Saskatchewan,  Antigua,  Johannesburg 
and  the  Straits  Settlements;  Harbor  Board  Mort- 
gages of  Oamaru  and  Wanganui;  Rangoon  Sterling 
Loans;  Municipal  Stocks  of  Pernambuco;  Buda- 
pest, St.  Louis,  Tokio,  Lima  and  Aarhus;  Ecuador 
salt  bonds  and  bonds  of  the  Grand  Duchy  of 
Finland;  securities  of  the  Greek  Piraeus  Larissa 
Railway,  Honduras  10  per  cent,  loans,  loans  of 
Liberia,  Persia  and  Siam,  and  certificates  of  the 
Venezuela  Diplomatic  Debt.  There  are  securi- 
ties of  the  Ionian  Bank,  the  Natal  Bank  and  the 
Bank  of  Abyssinia.  The  Terra  del  Fuego  Devel- 
opment Company  is  represented,  and  likewise 
Amazon  Telegraphs,  Malacca  Rubbers,  Singapore 
Electrics,  Rangoon  Tramways,  Montevideo  Water 
Works,  and  Sao  Paulo  Match  Factories.  Soda 
and    newspapers,    theatres    and    sawmills,    hotels 


362  THE  STOCK  EXCHANGE  FROM  WITHIN 

and  clothiers,  sponges  and  molasses,  soaps  and 
cereals,  these  are  some  of  the  items  that  catch 
the  eye  as  one  glances  over  the  List.  What 
would  be  found  there  if  all  the  securities  admitted 
to  the  House  were  published  in  the  List  may  be  left 
to  conjecture;  and  what  will  this  eloquent  array 
of  enterprise  in  figures  look  like  a  century  hence, 
if  the  List  continues  its  present  rate  of  growth? 
As  Great  Britain  is  a  country  where  there  is 
never  any  difficulty  about  raising  capital  for  the 
creation  or  extension  of  any  business  which  offers 
a  reasonable  probability  of  large  profits,  it  is 
natural  that  new  countries  where  capital  is  scarce 
and  credit  scarcer  should  turn  to  London.  Thus 
governments,  municipalities,  company  promoters 
and  manufacturers  from  all  over  the  world  are 
constantly  making  application  for  funds  with 
which  to  supply  their  needs.  Greek  railways, 
Abyssinian  banks,  Ceylon  tea  and  Malay  rubbers 
hasten  to  register  themselves  at  the  world's 
centre  of  capital  and  offer  their  shares  to  a  public 
whose  taste  for  all  kinds  of  world-wide  industrial 
and  commercial  ventures  seems  never  likely  to 
be  satiated,  since  the  really  good  and  profitable 
home  enterprises  are  seldom  open  to  public 
subscription.  The  insiders  in  those  bonanzas 
naturally  keep  their  treasures  to  themselves 
and    their   friends,  unless    after   a   time  the  con- 


THE  LONDON  STOCK  EXCHANGE   363 

cern  is  turned  into  a  limited  liability  company 
with  good-will  as  a  conspicuous  asset  and  over- 
capitalization as  the  dominating  motive;  then, 
as  elsewhere,  the  market  is  invited  to  assist.  But 
that  is  another  story. 

What  is  of  especial  interest  to  a  Wall  Street 
man  who  looks  over  the  enormous  list  of  Lon- 
don's Stock  Exchange  securities  is  the  function 
and  method  of  the  Listing  Committee  that  has  to 
pass  on  all  these  concerns  before  admitting  them 
to  the  House.  In  New  York  the  Stock  Exchange's 
"Committee  on  Stock  List"  insists  that  the  appli- 
cant company  must  be  able  to  show  at  least  one 
year's  earnings  —  a  most  important  condition. 
In  London  somewhat  different  conditions  pre- 
vail. The  committee  looks  into  the  bona  fides 
of  an  applicant  company  and  makes  inquiries 
concerning  the  people  behind  it,  but  it  does 
not  require  that  it  shall  have  done  business 
.for  at  least  a  year  and  show  a  year's  earnings, 
because  if  that  were  insisted  upon  as  a  con- 
dition precedent,  the  banks  would  not  finance 
it,  nor  the  public  support  it.  They  have  no 
"curb  market"  in  London  where  a  new  company 
may  pass  through  a  seasoning  or  preparatory 
period  while  awaiting  admission  to  the  Stock 
Exchange,  and  as  a  settlement  day  with  Stock 
Exchange   authority   is   rigorously   insisted    upon 


364  THE  STOCK  EXCHANGE  FROM  WITHIN 

by  those  who  provide  the  funds,  It  follows  that 
companies  must  be  admitted  at  least  to  "ofh- 
•cial  settlement"  privileges  as  soon  as  they  are 
organized. 

One  point  upon  which  the  London  Exchange 
authorities  lay  great  weight  in  the  admission  of 
new  securities,  consists  in  obtaining  assurances 
that  a  sufficient  number  of  shares  has  been  allotted 
to  the  public  before  admission  is  granted.  This 
is  a  thoroughly  wise  precaution,  designed  to  pre- 
vent corners  and,  as  far  as  possible,  improper 
manipulation.  Another  very  interesting,  and  I 
may  say,  a  very  wise  precautionary  measure  of 
the  London  method  of  listing,  is  the  prohibition 
placed  upon  vendor's  shares  —  a  plan  that  might 
well  be  adopted  in  New  York.  In  London,  for 
example,  a  vendor  —  i.  e.,  a  seller  of  the  property 
■ —  who  receives  shares  in  consideration  of  the 
sale,  cannot  have  his  shares  listed  until  six 
months  have  elapsed  after  shares  of  the  company, 
have  been  offered  to  the  public.  The  protection 
afforded  the  public  by  this  plan  is  obvious,  and 
requires  no  further  comment.* 

*  Rule  150  reads  as  follows:  "The  committee  will  not  fix  a  special  settling 
day  for  bargains  in  shares  or  securities  issued  to  the  vendors,  credited 
as  full  or  partly  paid,  until  six  months  after  the  date  fixed  for  the  special 
settlement  in  the  shares  or  securities  of  the  same  class  subscribed  for  by 
the  public,  but  this  does  not  necessarily  apply  to  reorganizations  or  amal- 
gamations of  existing  companies,  or  to  cases  where  no  public  shares  are 
issued  for  cash  "  —  Rules  and  Regulations  of  the  Stock  Exchange.  London, 
June  3,  191 1,  pp.  64-5. 


THE  LONDON  STOCK  EXCHANGE   365 

If  the  London  share  certificates  required,  as  in 
New  York,  only  a  simple  endorsement  for  transfer, 
much  of  the  annoyance  and  confusion  that  some- 
times takes  place  would  be  avoided.  The  market 
for  mining  shares,  for  example,  had  until  1888 
only  a  very  small  place  in  the  London  Stock. 
Exchange,  but  the  discovery  of  gold  in  the 
Witwatersrand  changed  all  that,  and  by  1894  the 
number  of  brokers  engaged  in  handling  mining 
shares  actually  exceeded  those  in  any  other 
department.  It  was  found  necessary  to  provide 
a  special  day  —  one  day  before  the  regular  settle- 
ment commenced  —  for  carrying  over  bargains  in 
mines,  but  owing  to  the  fact  that  mining  shares, 
like  nearly  all  securities  in  London,  were  "regis- 
tered" and  not  "to  bearer,"  the  clearing  house 
was  taxed  beyond  its  powers  by  the  immense 
volume  of  work  thrown  upon  it,  and  once  or  twice 
it  broke  down  completely. 

An  extraordinary  number  of  small  in- 
vestors bought  fractional  shares;  the  offices  of 
the  companies  were  not  prepared  for  the  rush 
and  could  not  handle  the  large  carry- 
over, hence  for  a  time  the  "Kaffir  Circus,"  as 
the  speculative  mania  of  the  day  was  called, 
promised  to  embarrass  seriously  the  whole  Ex- 
change machinery.  All  this  could  have  been 
avoided  by  making  the  shares  "to  bearer."     Yet 


366  THE  STOCK  EXCHANGE  FROM  WITHIN 

the  London  authorities  feel  —  and  not  without 
reason  when  we  consider  the  volume  of  their 
business  and  the  remoteness  of  their  clientele  in 
many  instances  —  that  bearer  certificates  are  not 
safe,  and  that  what  is  lost  in  the  time  spent  in 
transferring  certificates  is  amply  compensated  in 
the  resultant  security  against  fraud  and  forgery. 
It  is  interesting  to  note  in  connection  with  the 
enormous  business  done  on  the  London  Exchange 
—  a  business  which  makes  New  York's  high  totals 
seem  insignificant  —  on  what  a  vast  scale  Lon- 
don's exports  of  capital  are  conducted.  This 
may  properly  be  noticed  here,  since  these  capital 
exports  have  great  economic  significance  and  bear 
close  relationship  to  the  transactions  on  the  Stock 
Exchange;  indeed  were  it  not  for  the  work  done 
by  the  Exchange  in  providing  markets  and  settle- 
ments and  all  the  details  of  the  security  business, 
it  is  fair  to  say  there  could  be  no  such  public 
issues  of  capital.  In  1910,  for  example,  new 
capital  expenditures  amounted  to  the  extraor- 
dinary figure  of  £267,439,000,  of  which  £60,296,500 
was  expended  in  the  United  Kingdom,  £92,378,100 
in  the  various  British  possessions,  and  £1 14,764,500 
in  foreign  countries.  Of  the  grand  total  £49,974,- 
000  went  Into  foreign  railways,  £10,096,000  into 
Indian  and  Colonial  railways,  £35,631,600  into 
Colonial  government  loans,  £18,431,000  into  for- 


THE  LONDON  STOCK  EXCHANGE   367 

eign  government  loans,  £18,343,100  into  explora- 
tions, and  £19,143,800  into  rubber.*  The  year 
1910  was,  of  course,  a  year  of  great  prosperity  in 
England,  and  it  was  a  year  made  famous  by 
speculative  activity  in  various  directions,  espe- 
cially in  rubber,  so  that  the  totals  given  above  are 
larger  than  they  had  ever  been  before.  But 
the  point  for  us  in  America  to  bear  In  mind  in 
considering  these  figures  is  their  immense  signifi- 
cance as  showing  England's  complete  supremacy 
In  capital,  credit,  and  the  art  of  banking. 

The  Immense  number  of  securities  dealt  In, 
coupled  with  the  speculative  propensities  of  the 
people  and  the  ramifications  of  British  finance, 
naturally  go  to  make  that  Exchange  a  peculiarly 
sensitive  and  vulnerable  spot,  and  the  American 
visitor  may  well  wonder  what  would  happen  there 
if  the  ancient  bogy  of  war  between  England  and 
any  other  first-rate  power  should  some  day  become 
a  reality.  War  is,  as  every  one  knows,  the  greatest 
destroyer  of  capital.  England's  little  Transvaal 
war  cost  $1,000,000  a  day,  and  by  the  Chancellor 
of  the  Exchequer's  report  resulted  in  a  total 
expenditure  of  $1,085,000,000.  The  war  between 
Russia  and  Japan  cost  upward  of  $3,000,000 
daily  and  $2,000,000,000  all  told.     What  a  great 

*  These  figures  are  taken  from  Mr.  Hirst's  Chapter    VIII    on    "The 
Creation  of  New  Debt  and  Capital,"  pp.  212-241. 


368  THE  STOCK  EXCHANGE  FROM  WITHIN 

war  would  cost  England  If  that  country  were  to 
cross  swords  with  one  of  the  powers  may  be 
conjectured;  what  would  happen  in  the  Stock 
Exchange  taxes  the  imagination. 

In  the  month  in  whith  these  lines  are  written 
the  London  Stock  Exchange  and  all  the  conti- 
nental Bourses  are  having  their  periodic  scare  over 
a  war  in  the  Balkans.  British  consols  have  fallen 
almost  seven  points  from  the  high  price  of  the  year; 
French  rentes  seven,  German  3s.  six,  and  Russian 
4s.  seven.*  These  are  very  severe  declines  for 
government  securities  of  that  class,  and  if  they 
can  fall  abruptly  over  difficulties  in  the  Balkans, 
what  would  happen  were  these  countries  them- 
selves involved  in  war  with  foemen  of  their  own 
class?  Russian  consolidated  4s.  fell  eleven  points 
and  Japanese  5s.  twelve  in  the  first  month  of  the 
Manchurian  war,  and  in  our  war  with  Spain, 
Spanish  4s.  fell  from  61  to  29!.  If  such  things  can 
happen  to  government  securities,  what  would  hap- 
pen to  all  the  9000  odd  industrial  and  kindred 
securities  dealt  in  on  the  London  Exchange  should 
England  take  up  the  sword  with,  let  us  say, 
Germany.^  We  are  not  left  to  conjecture  on  this 
point,   for  in   the  week  that  has  just  witnessed 


*  It  should  be  said  that  at  least  a  part  of  the  decline  in  these  securities 
had  taken  place  before  the  Balkan  scare  became  a  reality.  A  foreknowledge 
of  what  was  impending  may  have  influenced  the  earlier  decline;  certainly 
the  event  itself  accentuated  and  hastened  it. 


THE  LONDON  STOCK  EXCHANGE   369 

the  Balkan  scare  there  have  been  some  really 
tremendous  slumps  in  securities  —  collapses  out 
of  proportion,  it  would  seem  at  this  distance, 
to  the  magnitude  of  the  political  issues  threatened. 

In  Paris,  for  example,  there  has  just  been  wit- 
nessed a  two-day  break  of  185  points  in  Sosno- 
viche  Collieries,  a  one-day  break  of  165  points 
in  Bakou  Naphtha,  a  decline  within  a  few  hours 
of  115  points  in  Russian  Naphtha  and  overwhelm- 
ing breaks  of  from  50  to  150  francs  in  Paris 
Light  and  Transport  shares,  Rio  Tintos,  and 
Electrics.  No  such  demoralization  has  been  seen 
in  any  foreign  financial  market  within  twenty-five 
years.  This  slump  was  no  doubt  due  in  large 
part  to  a  top-heavy  speculative  position  and  to 
consequent  financial  congestion,  but  it  was  the 
Balkan  war-cloud  that  caused  the  real  difficulty 
none  the  less,  and  it  supplies  an  outsider  with 
an  idea  of  what  may  happen  in  a  real  emergency. 

Foreigners  are  prone  to  speak  of  Yankee  specu- 
lation as  foolhardy  and  reckless,  as  no  doubt  it 
is  at  times,  but  never  in  American  history  has  there 
been  a  panic  with  anything  like  the  severe  declines, 
in  so  brief  a  period,  as  those  just  recorded.  For 
that  matter,  we  in  America  have  never  experi- 
enced a  boom  in  any  sense  commensurate  with 
London's  rubber  boom  of  1909-10,  nor  a  collapse 
as   sudden   and   as   thoroughly  deserved   as   that 


370  THE  STOCK  EXCHANGE  FROM  WITHIN 

which  followed  it.  Again,  London's  Kaffir  Circus 
of  1894-5,  ^^^  ^h^  furious  speculation  in  Panama 
shares  in  Paris  in  the  early  nineties,  have  had  no 
parallel  in  American  stock  markets.  This  is 
only  another  way  of  saying  that  the  speculative 
mania  which  seizes  upon  nations  at  periodic 
intervals  is  not  a  matter  of  latitude  and  longitude 
in  any  sense.* 

In  trying  to  picture  what  would  happen  in  the 
London  Stock  market  should  such  a  war  as  that 
which  Englishmen  are  always  discussing  really 
occur,  we  must  take  into  account  not  only  the 
mass  of  securities  that  would  be  directly  affected, 
but  also  the  great  burden  borne  by  London 
banks  and  bankers  in  security  issues  all  over 
the  world.  On  another  page  we  have  seen  that 
London's  capital  expenditures  on  new  issues  in 
various  quarters  of  the  globe  in  a  single  year  ex- 
ceeded £267,000,000;  in  the  quarter  just  closed 
(September,  191 2),  these  disbursements  ran 
£25,000,000  above  the  previous  year. 

That  they  will  continue  so  to  increase  is  open 
to  no  doubt  as  long  as  England's  abstention  from 
war  is  assured;  but  if  there  should  arise  even  the 

*  London  jobbers  were,  in  a  way,  instrumental  in  checking  the  furious 
speculation  in  "rubbers"  toward  the  culmination  of  the  boom  of  1909-10. 
Their  absolute  refusal  to  carry  rubber  shares  for  brokers,  and  their  con- 
certed insistence  that  such  shares  should  be  paid  for  in  full  on  the  ensuing 
account  day,  undoubtedly  put  the  brakes  on  a  furious  speculation,  and 
prevented  many  failures. 


THE  LONDON  STOCK  EXCHANGE   371 

possibility  of  war,  it  would  result  in  an  embarrass- 
ment of  credit  with  terribly  serious  results,  such  as 
have  never  been  dreamed  of  in  the  world's  history. 
The  many  years  of  peace  between  the  great 
powers,  the  many  new  countries  that  have  been 
opened  to  commercial  development,  and  the 
countless  new  fields  of  industrial  endeavor  that 
have  come  into  being  while  this  peace  has  lasted, 
have  served  to  create  a  British  credit  situation 
huge  and  complicated  beyond  all  precedent.  Any 
serious  interruption  or  derangement  of  so  vast 
a  system  would  find  a  very  different  situation 
from  that  which  existed  on  the  Continent  in 
1870.     It  would  be  appalling. 

And  yet,  ere  we  go  too  far  afield  in  search  of  the 
shivers,  the  observer  must  bear  in  mind  that  this 
great  credit  system  of  which  London  is  the  banker 
and  clearing  house,  in  reality  knits  together  in 
its  international  web  all  the  great  powers,  and 
binds  them  so  closely  together  as  to  guarantee, 
in  some  measure,  the  preservation  of  peace. 
That  peace  hath  her  victories,  and  that  the 
creation  of  wealth  through  industrial  pursuits  may 
serve  in  this  way  to  prevent  armed  strife  —  these 
are,  after  all,  encouraging  indications  quite  as 
strong  as  treaties.  To-day  the  bankers  of  London 
and.  Paris  are  the  war  lords  of  creation.  Both 
these    centres    loan    money,    on    early    maturing 


372  THE  STOCK  EXCHANGE  FROM  WITHIN 

bills,  to  all  the  world.  Stop  London's  discounts 
through  an  outbreak  of  war,  and  gold  would  pour 
into  that  centre  at  the  rate  of  $200,000,000  a 
month.  "It  might  be  possible  to  starve  her 
population,"  says  a  recent  writer,  "but  no  com- 
bination of  the  Powers  could  bankrupt  London. 
In  the  event  of  war  Paris  could  bankrupt  Ger- 
many in  a  week.  No  war  could  disturb  the  credit 
of  the  Bank  of  France;  but  the  German  Reichsbank 
would  inevitably  go  down  in  the  smash.  All 
Germany's  capital  is  in  her  own  shop.  She  is 
doing  a  great  business,  and,  quite  properly,  a 
great  part  of  it  on  borrowed  money.  But  if  her 
loans  were  called,  she  must  put  up  the  shutters."* 
Let  us  now  observe  the  London  broker  at  his 
work.  The  Stock  Exchange,  as  has  been  de- 
scribed, settles  nearly  all  of  its  transactions  twice 
a  month,  upon  officially  appointed  "account 
days,"  which  fall  about  the  middle  and  the  end  of 
every  month.  Smith,  a  broker,  receives  an  order 
to  buy,  let  us  say,  500  East  Rands,  and  goes  to  a 
jobber  who  makes  a  specialty  of  that  department. 
The  jobber,  Jones,  is  a  wise  man  and  a  clever 
trader,  who  knows  all  there  is  to  know  about 
supply  and  demand  and  regulation  of  prices  to 
meet  them,  otherwise  he  would  soon  be  out  of 
business.     Smith  does  not  tell  him  what  he  pro- 

*  The  Wall  Street  Journal,  November  13,  1912. 


THE  LONDON  STOCK  EXCHANGE   373 

poses  to  do,  but  asks  for  a  price,  which  in  normal 
markets  Jones  quotes  at  3I  to  3^^,  this  being  the 
method  of  implying,  in  pounds  sterling,  that  he 
is  prepared  to  buy  at  70s,,  or  to  sell  at  71s.  3d. 
The  broker  will  probably  say  that  the  price  is 
too  wide,  whereupon  Jones  quotes  a  figure  "close 
to  close,"  reducing  the  quotation  -5-^  each  way, 
at  which  figure  the  transaction  is  closed.*  Smith 
enters  in  his  book  that  he  has  bought  of  Jones 
500  East  Rands  at  the  price  stated,  and  Jones, 
that  he  has  sold  at  this  price  to  Smith.  The 
customer  is  then  advised  of  the  transaction,  and 
next  day  he  receives  his  stamped  contract,  with 
details  covering  the  cost  of  the  shares  together 
with  brokerage  and  other  expenses,  if  any,  and 
informing  him  of  the  date  of  the  next  account 
day,  when  payment  will  fall  due. 

Beneath  the  main  floor  of  the  Exchange  Is  the 
settling  room,  and  here  the  clerks  of  broker  and 
jobber  check  the  transaction  that  has  taken 
place.  Two  days  before  the  account  the  name 
of  the  person  for  whom  the  East  Rands  were 
bought  is  written  on  a  ticket  —  hence  "ticket 
day"  —  and  handed  to  the  Stock  Exchange 
Clearing  House,  which,  after  the  manner  of  the 
Stock   Exchange  Clearing  House  in  New  York, 

*  On  the  New  York  Stock  Exchange  the  minimum  difference  between 
prices  is  one  eighth  and  sphtting  of  this  fraction  is  prohibited  save  in  the 
case  of  "rights"  to  subscribe  or  similar  instances. 


374  THE  STOCK  EXCHANGE  FROM  WITHIN 

eliminates  all  the  intermediaries  through  whose 
hands  the  shares  may  have  passed  ad  interim, 
and  puts  the  selling  broker  into  direct  communi- 
cation, by  passing  him  the  ticket,  with  the  broker 
of  the  buyer.  This  done,  the  seller  receives  the 
ticket  with  the  buyer's  name  on  it,  and  prepares 
a  transfer  deed  as  the  law  requires.*  Had  the  client 
bought  the  shares  of  an  American  railway  instead 
of  East  Rands,  the  procedure  following  the  pur- 
chase would  have  been  somewhat  different,  be- 
cause American  shares  bear  a  form  of  transfer  on 
the  back  which  requires  the  signature  of  the 
seller  only,  and  which  becomes,  by  reason  of  this 
fact,  almost  as  readily  negotiable  as  bank-notes. 
In  London  consols  can  be  dealt  in  in  this  way, 
but  the  customary  form  of  conveyance  of  the 
funds,  and  of  Indian  and  Colonial  stocks,  con- 
sists of  a  brief  transfer  on  the  books  of  the  bank 
acting  as  agent  for  the  particular  issue.  Thus 
the  Bank  of  England  keeps  the  books  for  consols 
and  India  government  stocks,  and  sellers  or  their 
attorneys  must  attend  personally  at  the  bank 
and  sign  the  transfer.  The  bank  insists  that 
every  seller  must  be  identified  by  a  member  of  the 
Stock  Exchange,  whose  signature  must  be  regis- 
tered there,  and  it  places  full  responsibility  upon 

*  In  the  settling  room  on  ticket  day  stocks  that  are  not  cleared  pass  by 
ticket  from  broker  to  broker  in  much  the  same  way  as  that  provided  by  the 
Clearing  House. 


THE  LONDON  STOCK  EXCHANGE   375 

these  members  for  correct  identifications.  This 
was  long  a.  sore  point  with  the  Stock  Exchange, 
and  it  was  fought  to  a  finish  in  the  courts,  but 
the  Bank  won  "in  a  walk." 

The  transaction  just  cited  in  the  case  of  East 
Rands  is  based  on  the  supposition  that  the 
original  buyer  proposed  to  "take  up,"  or  pay 
for  his  shares  in  full.  If  he  is  merely  a  speculator, 
hoping  to  sell  at  a  profit  before  the  settling  day 
and  pocket  the  difference,  a  somewhat  different 
procedure  is  involved,  especially  if  at  the  ap- 
proach of  settling  day  the  hoped-for  rise  has 
not  appeared.  In  that  case  he  asks  his  broker 
to  "carry-over,"  "contango,"  or  "give  on,"  the 
shares  he  has  bought,  and  the  broker,  to  whom 
this  is  an  hourly  occurrence,  naturally  has  at  his 
finger  tips  ample  facilities  for  doing  what  is  re- 
quired. 

Going  to  the  jobber,  he  says  he  wants  to 
"give  on"  five  hundred  East  Rands.  The  jobber 
says  he  will  "take  them  in,"  which  means  that 
he  will  lend  the  money  until  next  following 
settlement,  charging  interest  at,  say,  5  per  cent., 
while  the  broker  in  turn  charges  his  client  5^ 
per  cent,  and  takes  the  interest  difference  as 
compensation  for  the  service.  The  buyer's  specu- 
lation is  thus  extended  to  the  next  settlement,  and 
the  statement  given  him  shows  that  he  has  been 


376  THE  STOCK  EXCHANGE  FROM  WITHIN 

debited  with  the  interest  upon  the  "making-up 
price,"  at  which  the  transaction  is  arranged. 
The  rate  of  interest  is  called  the  "contango," 
and  "contango  days"  are  the  two  days  during 
the  settlement  when  these  arrangements  are  in 
effect  :* 

"  The  Stock  Exchange  has  witnessed  many  periods  of  wild 
excitement  and  speculation,  reminding  one  of  the  famous 
South  Sea  Bubble  —  perhaps  the  most  remarkable  "boom"  on 
record  —  the  story  of  which,  however,  has  been  so  often  and 
so  vividly  told  by  Smollett  and  later  writers  that  we  need 
only  refer  to  it  here.  Just  before  the  middle  of  the  last 
century  came  the  great  railway  boom.  It  began  about  1834, 
and  within  one  year  more  than  six  hundred  propositions  for 
railway  lines  in  the  United  Kingdom  were  placed  before  the 
public,  the  nominal  capital  required  being  over  600,000,000 
pounds  sterling.  Panic,  of  course,  followed  the  boom;  and, 
as  an  example  of  the  rapidity  with  which  prices  moved,  it 
may  be  mentioned  that  the  Great  Western  Railway  stock 
rose  to  236  in  1845,  and  fell  back  to  55^  within  three  years, 
while  Midland  stock  rose  to  183  and  fell  to  64.  After  the 
railway  boom  and  panic  came  several  banking  crises,  of 
which  the  worst  were  those  identified  with  the  names  of 
Overend,  Gurney,  &  Co.  in  1866,  and  of  Baring  Brothers 
in  1890.  For  five  years  after  the  latter,  the  Stock  Exchange 
lay  fallow,  with  business  and  credit  worn  to  a  shadow. 
Then  came  the  famous  Kaffir  boom,  of  which  it  may  be  said 


*  Although  an  effort  has  been  made  in  these  pages  to  avoid  complicated 
Stock  Exchange  technique,  the  contango,  which  is  not  fully  understood 
in  America,  requires  technical  explanation.  It  may  be  defined  as  a  double- 
bargain,  in  that  it  consists  of  a  sale  for  cash  of  the  stock  previously  bought 
which  the  broker  does  not  wish  to  carry,  and  a  repurchase  for  the  new 
settlement  two  weeks  ahead,  of  the  same  stock  at  the  same  price  as  the 
sale,  plus  interest  agreed  upon  up  to  the  date  of  that  settlement. 


THE  LONDON  STOCK  EXCHANGE        377 

that  Cecil  Rhodes  stood  out  as  the  colossus.  The  madness 
of  that  boom  has  rarely  been  equaled,  even  in  the  history  of 
the  Yankee  market.  It  makes  one  hot  even  on  a  cold  day  to 
think  of  the  time  when,  as  a  clerk,  one  tore  off  coat,  waistcoat, 
collar,  and  tie  in  order  to  run  the  faster  in  the  settling  room 
beneath  the  Stock  Exchange,  "passing  names"  (as  it  is 
technically  called)  in  connection  with  that  gamble.  A 
Rugby  football  scrum  was  child's  play  to  the  continued 
struggles;  and,  after  the  most  violent  excitement  had  sub- 
sided, there  were  always  fights  to  be  settled  before  one  went 
upstairs  to  work  the  whole  night  through. 

"  A  period  of  collapse  followed  this  episode.  After  various 
minor  upheavals  there  came  in  1910  the  rubber  boom,  which, 
perhaps  with  the  Kaffir  Gamble,  more  nearly  recalls  the 
excitement  of  1720  than  any  other.  The  rubber  boom  had 
not,  indeed,  the  same  noble  backing  which  the  South  Sea 
Company  boasted;  but  clergymen  and  ladies  were  prominent 
operators  as  'bulls,'  'stags,'  or  both."* 

The  thought  will  no  doubt  occur  to  an  American 
who  reads  these  pages,  whether  the  day  will  come 
when  American  banking  will  extend,  as  in  Eng- 
land, to  every  quarter  of  the  globe,  and  whether 
the  New  York  Exchange,  like  its  London  proto- 
type, will  become  a  centre  of  the  world's  com- 
mercial activities.  This  is  a  far  cry,  of  course, 
and  the  answer  will  not  be  known  in  our  genera- 
tion.    But  it  may  be  said  without  fear  of  con- 


*  The  methods  of  transacting  business  on  the  London  Stock  Exchange 
are  admirably  stated  in  condensed  form  in  an  article  by  Walter  Landells 
in  the  Quarterly  Review,  July,  1912,  pp.  88-109,  and  I  am  indebted  to  his 
article  for  many  of  the  foregoing  facts,  and  for  this  brief  summary  of  London's 
booms  and  crises. 


378  THE  STOCK  EXCHANGE  FROM  WITHIN 

tradiction  that  when  a  great  nation  Hke  ours, 
in  which  the  spirit  of  enterprise  is  manifest,  has 
reached  the  point  where  its  own  domain  has  been 
developed,  when  it  has  perfected  a  sound  banking 
and  currency  system,  when  it  has  recovered  its 
lost  shipping  and  mastered  those  economic  lessons 
that  the  future  has  in  store,  it  may  confidently 
be  expected  to  push  out  into  new  lands  and  supply 
their  demands  for  capital. 

Already  we  have  in  America  a  world's  store- 
house of  necessary  commodities,  with  wealth  and 
intelligence  that  increases  by  leaps  and  bounds. 
No  nation  stands  a  better  chance  of  escaping  the 
horrors  of  war  and  its  ruinous  losses.  China 
remains  a  fertile  field  for  commercial  en- 
deavor in  the  years  to  come,  and  our  neigh- 
bors on  the  south  may  one  day  know  us 
more  intimately.  The  retrospective  eye,  sur- 
veying commercial  and  financial  America  in 
the  sixties  and  contrasting  it  with  America  of 
to-day,  sees  clearly  that  progress  has  been  made, 
and  looks  beyond  toward  progress  to  come.  In 
any  case  civilization  must  advance  and  trade 
expand,  and  American  energy  must  advance 
and  expand  with  them.  I  wish  I  might  visit 
Wall  Street  and  the  Stock  Exchange  a  century 
heAce.* 


*  In  addition  to  the  authorities  quoted  in  the  foregoing  chapter,  the  atten- 


THE  LONDON  STOCK  EXCHANGE   379 

tion  of  the  reader  is  directed  to  the  following  works  having  to  do  with  the 
London  Stock  Exchange: 

Lombard  Street,  by  Walter  Bagehot,  New  York,  Chas.  Scribncr's,  and 
Sons. 

Stocks  and  Shares,  by  Hartley  Withers,  London,  Smith  Elder,  1910. 

Stock  Exchange  Law  and  Practice,  by  W.  A.  Bewes,  London,  Sweet  & 
Maxwell,  19 10. 

Rise  of  the  London  Money  Market,  1640-1826,  by  W.  R.  Bisschop,  Lon- 
don, King,  1910, 

The  Mechanism  of  the  City,  by  Ellis  T.  Powell,  London,  King,  1910. 


CHAPTER  X 

THE    PARIS    bourse;    A    MONOPOLY    UNDER 
GOVERNMENT 


CHAPTER  X 

THE    PARIS    bourse;    A    MONOPOLY     UNDER 
GOVERNMENT 

"Patriotism  makes  it  a  duty  for  us  to  acknowl- 
edge the  fact  that  the  Bourse  represents  one  of 
the  live  forces  of  France,"  wrote  Anatole  Leroy- 
Beaulieu  in  one  of  the  finest  tributes  ever  paid  to 
a  Stock  Exchange.  "It  has  been  for  France  an 
instrument  of  regeneration  after  defeat,  and  it 
remains  for  us  a  powerful  tool  in  war  and  In  peace. 
Let  us  recall  the  already  remote  years  of  our 
convalescence,  after  the  invasion,  years  at  once 
sorrowful  and  comforting,  when  with  the  gloom 
of  defeat  and  the  suffering  of  dismemberment, 
mingled  the  joy  of  feeling  the  revival  of  France. 
Whence  came  our  first  consolation,  our  first  vin- 
dication before  the  world?  Whether  glorious  or 
not,  it  originated  on  the  Bourse." 

The  victorious  Prussians  were  at  the  door  in 
the  humiliating  crisis  of  1870  and  '71  to  which 
the  author  refers,  France  was  prostrate.  Alsace 
and  parts  of  Lorraine  were  to  be  ceded  to  the 
victors,   together    with     an     Indemnity    of    five 

383 


384  THE  STOCK  EXCHANGE  FROM  WITHIN 

billion  francs,  and  Paris  was  in  control  of  the 
Reds.  In  that  dreadful  saturnalia  of  violence 
and  crime  which  has  made  the  name  of  the  Com- 
mune infamous,  the  honor  of  France  was  threat- 
ened, and  the  credit  of  the  new  Republican 
government,  especially  its  ability  to  maintain  its 
authority  and  to  fulfill  its  terms  with  the  Prus- 
sians, seemed  hopeless  and  cheerless  indeed.  How 
Thiers  became  the  brains  of  the  rehabilitation  of 
France,  with  what  vigor  he  entered  upon  the  task 
that  has  handed  down  his  name  as  the  most 
influential  political  figure  in  French  history ^ — -with 
what  rigorous  measures  MacMahon  suppressed 
the  Commune  —  these  are  spectacular  incidents 
with  which  every  schoolboy  is  familiar.  But 
the  work  of  the  Bourse  in  that  episode  —  silent, 
unobtrusive,  and  lacking  the  sensational  features 
of  ■  which  popular  histories  are  made,  is  by  no 
means  so  well  known,  although  upon  its  labors 
devolved  the  real  upbuilding  of  France.  Thiers 
never  ceased  to  congratulate  himself  on  the 
assistance  it  gave  the  country  at  a  time  when  the 
liberation  of  French  territory  hung  in  the  balance. 
"The  Paris  market  came  out  unscathed  from 
the  ruins  of  the  war  and  of  the  Commune," 
continues  our  author,  "and  straight  from  the 
hardly  ratified  peace  and  quelled  insurrection  it 
threw  itself  into  the  work  for  France's  regeneration; 


THE  PARIS  BOURSE  385 

because  It  was,  indeed,  for  France's  regeneration 
that  the  stockbrokers  and  merchandise  brokers 
worked  under  Thiers  and  MacMahon.  In  the 
worst  days  the  Bourse  had  the  uncommon  merit 
of  showing  an  example  of  faith  in  France.  When 
more  than  one  pohtical  skeptic  and  discouraged 
thinker  allowed  themselves  to  write  down  upon 
the  crumbling  walls  of  our  burned-down  palaces 
"Finis  Galliae, "  the  Bourse  kept  its  faith  in 
France  and  her  fortune,  and  that  faith  in  France 
was  spread  by  it  all  around,  at  home  and  abroad. 
"  Speculation  was  patriotic  in  its  way;  it  exhib- 
ited a  confidence  in  our  resources  which  the  discre- 
tion of  many  a  wise  man  rated  as  foolhardy.  Have 
we  already  forgotten  our  great  loans  for  liberation? 
Without  the  Bourse,  these  colossal  loans,  the 
amount  of  which  exceeded  the  dreams  of  financiers, 
would  never  have  been  subscribed  for,  or,  if  ever, 
it  would  have  been  only  at  rates  much  more 
onerous  for  the  country.  Without  the  Bourse, 
our  French  rentes  would  not  have  taken  such 
rapid  flight;  our  credit,  restored  even  more 
quickly  than  our  armies,  would  not  have  equaled 
that  of  our  victors,  on  the  very  morrow  of  our 
defeat.  In  that  regard,  all  that  justice  demanded 
us  to  say  previously  of  the  higher  banking  institu- 
tions may  with  right  be  repeated  concerning  the 
Bourse. 


386  THE  STOCK  EXCIL\NGE  FROiM  WTTHIN 

"To  those  who  lived  through  that  pale  dawn  of 
France's  recovery  —  the  rush  of  the  Bourse  and 
of  capitalists  to  offer  us  the  thousands  of  millions 
which  we  required  exceeded  the  eagerness  and 
boldness  of  speculation.  But  even  if  we  were  to 
consider  it  but  gambling  and  betting  for  specula- 
tion, such  speculation  was  betting  for  France's 
regeneration;  it  bravely  placed  its  bet  on  the 
vanquished.  Those  national  and  foreign  finan- 
ciers, who  have  been  accused  of  pouncing  upon 
her  like  birds  of  prey,  brought  to  the  noble 
wounded  their  dollars  and  their  credit,  and  if  they 
reaped  a  profit  thereby,  are  we  to  reproach  them 
for  It,  when  they  helped  us  to  reconstruct  our 
armies,  our  fleet,  and  our  arsenals.? 

"  If  France  regained  her  rank  among  the  nations 
of  the  world  so  quickly,  the  credit  for  it  should  be 
mainly  given  to  the  Bourse.  And  to  Its  services 
in  war,  we  should,  if  we  wanted  to  be  just,  also  add 
its  services  in  time  of  peace.  Without  the  exten- 
siveness  of  the  Paris  market,  and  the  stimulus 
given  to  our  capitalists  through  speculation,  how 
many  things  would  have  remained  unaccomplished 
in  the  recklessly  overdriven  condition  of  our 
finances.''  We  should  have  been  unable  to  com- 
plete our  railroad  system,  or  renew  our  national 
stock  of  tools,  or  create  beyond  the  seas  a  colonial 
empire  which  shall  cause  France  to  be  again  one 


THE  PARIS  BOURSE  387 

of  the  great  world  powers.  When  the  Bourse 
is  on  trial,  such  credentials  should  not  be  over- 
looked. Before  condemning  it  in  the  name  of 
morality  and  private  interests,  a  patriot  should 
give  due  consideration  to  its  services  rendered  for 
the  national  weal;  if  all  its  defects  and  misdeeds 
be  heaped  up  on  one  scale  tray,  then  services  of 
like  importance  will  easily  counterbalance  them.  "* 
Singing  the  praises  of  Stock  Exchanges  is  a 
thankless  task,  and  one  that  falls  upon  deaf  ears. 
The  very  nature  of  its  functions  makes  dull  read- 
ing. It  cannot  hope  to  enlist  the  lively  enthusiasm 
of  the  casual  observer,  nor  has  it  picturesqueness 
to  brighten  the  pages  of  history.  The  layman 
visits  the  great  exchanges  as  a  matter  of  course; 
the  scene  is  animated  and  diverting;  he  sees  the 
outward  manifestations  of  energy  and  move- 
ment, but  too  often  he  misses  the  great  silent 
forces  at  work.  The  eye  has  a  fine  time  of  it,  but 
the  intellect  comes  away  empty.  These  are 
reasons  why  I  have  ventured  to  quote  the  fore- 
going passages  from  M.  Leroy-Beaulieu.  Some- 
where in  his  earnest  tribute  to  the  work  of  the 
Paris  Bourse  the  reader  may  find  food  for  thought. 

*  Anatole  Leroy-Beaulieu,  La  Regence  de  I'argent,  "  Revue  des  Deux 
Mondes."     February  25,  1897,  pp.  894  and  895. 

(M.  Leroy-Beaulieu  is  tlie  elder  brother  of  Paul,  the  French  economist. 
In  1881  he  became  professor  of  modern  history  at  the  Ecole  Libre  des 
Sciences  Politiques,  and  in  1887  was  made  a  member  of  the  Academy  of 
Moral  and  Political  Sciences.     His  fame  as  a  publicist  is  established.) 


388  THE  STOCK  EXCHANGE  FROM  WITHIN 

The  Bourse  in  Paris  differs  from  all  others  in 
that  its  membership  consists  of  but  seventy. 
These  Agents  de  Change,  as  they  are  called,  enjoy 
an  absolute  monopoly  not  only  to  trade  in  govern- 
ment and  other  officially  listed  securities,  but 
also  to  negotiate  bills  of  exchange  and  similar 
instruments  of  credit.  In  these  circumstances  it 
is  easy  to  see  why  the  Bourse  is  an  institution 
of  enormous  strength,  notwithstanding  the  fact 
that,  because  of  the  deep-rooted  conservatism  of 
the  French  in  financial  matters,  it  stands  a  poor 
second  to  London  in  international  business. 

It  exists  by  virtue  of  the  decree  of  October  7, 
1900,  regulating  the  execution  of  article  90  of  the 
Code  du  Commerce  and  of  the  law  of  March  28, 
1885,  as  modified  by  the  decree  of  January  29, 
1898.  These  laws  provide  that  Agents  de  Change 
of -the  Paris  Bourse  must  be  French  citizens  over 
twenty-five  years  of  age,  and  in  possession  of 
civil  and  political  rights;  they  must  be  nominated 
by  official  decree  signed  by  the  President  of  the 
Republic.  They  must  have  performed  their 
military  service  or  satisfied  the  law  as  to  such 
service,  they  must  produce  a  certificate  of  fitness 
and  good  character  signed  by  the  heads  of  several 
banking  and  commercial  firms.  Agents  de  Change 
are,  in  reality,  officers  of  the  government,  since 
the  seventy  ministerial  appointees  are  entrusted 


THE  PARIS  BOURSE  389 

with  the  exclusive  right  of  dealing  in  government 
securities;  all  such  dealings,  in  fact,  when  not 
made  directly  by  private  individuals,  must  be 
made  through  Agents  de  Change. 

The  enjoyment  by  stockbrokers  of  a  complete 
monopoly  under  government  is  sufficiently  unique 
to  warrant  an  inquiry  as  to  the  origin  of  such  a 
curious  privilege.  The  employment  of  stock- 
brokers by  persons  who  wished  to  sell  certificates, 
or  other  negotiable  instruments  of  the  period, 
was  made  obligatory  by  an  edict  of  Louis  XIV 
in  1705.  Twenty  "offices"  (memberships)  of 
brokers  in  Paris  were  then  created,  and  these 
twenty  were  accorded  a  monopoly  similar  to  that 
of  to-day.  Prior  to  that  period  there  had  been 
^'offices"  of  exchange  brokers,  bank  brokers,  and 
merchandise  brokers,  but  the  King  felt  that 
these  were  not  contributing  enough  to  the  Royal 
exchequer  and  swept  them  all  away  in  the  edict 
of  1705,  when  the  present  system  had  its  birth. 
The  wars  and  the  King's  extravagances  had 
placed  the  exchequer  in  a  bad  way,  and  between 
1691  and  1709,  some  40,000  privileges  of  various 
kinds  were  sold  for  cash,  among  them  the  privilege 
under  which  these  twenty  men  were  to  do  the 
business  of  stockbroking  in  Paris.  "Sire,"  said 
Pontchartrain,  "every  time  Your  Majesty  creates 
an  office,  God  creates  a  fool  to  buy  it. " 


390  THE  STOCK  EXCHANGE  FROM  WITHIN 

But  the  stockbrokers  were  not  to  remain  in 
undisturbed  possession  of  their  new  privileges, 
for,  whenever  the  state  of  the  Royal  finances  was 
low,  the  King  withdrew  the  old  offices  in  order 
to  grant  new  ones,  always  for  cash,  to  fresh 
buyers,  and  this  was  repeated  again  and  again. 
Thus  the  next  King  Louis  XV,  whose  personal 
follies,  together  with  the  schemes  of  the  Scotch- 
man, John  Law,*  brought  the  country  to  the 
verge  of  ruin,  repealed  in  1726  the  Edict  of  1705 
and  returned  to  it  again  in  1733.  His  successor, 
the  weak  and  incapable  Louis  XVI,  repeated  this 
performance  in  1785,  1786,  and  in  1787.  In  1788, 
the  stockbrokers  having  agreed  to  waive  accumu- 
lated interest  on  their  security  deposits,  were 
again  established  in  their  powerful  monopoly. 
The  critical  financial  situation  that  arose  in  the 
early  days  of  the  Revolution  saw  them  again 
legislated  out  of  office  (June  27,  1793);  the  Bourse 
was  closed,  the  stockbrokers  arrested  and  their 
goods  confiscated,  because,  in  the  imperfectly 
understood  economics  of  the  period,  the  decline  in 
Frenchpaper  currency  Cassignats)  was  attributed, 
faute  de  mieux,  to  stock-jobbing.  Two  years  later 
the  Bourse  was  opened  again,  and  after  eight  days 
■ —  the  assignat  continuing  to  decline,  it  was  again 
closed.     Meantime  France  went  Into  bankruptcy. 

*  John  Law  was  the  inventor  of  "bearer"  certificates. 


THE  PARIS  BOURSE  391 

In  1 801  the  modern  Bourse  was  established  and 
firmly  fixed. by  the  legislative  work  of  the  Consu- 
late. The  law  then  enacted  requires  that  stock- 
brokers be  appointed  to  their  public  trust  by  the 
government,  which  shall  be  guided  in  its  choice 
by  their  moral  character  and  their  professional 
knowledge,  and  shall,  besides,  demand  the  pledg- 
ing of  a  part  of  their  fortune  with  the  State  as  a 
guarantee  of  their  good  conduct  and  of  proper 
expiation  for  their  errors  or  failures.  The  law 
also  emphasizes  the  principle  of  the  freedom  of 
commerce,  expressly  stating  that  nobody  is 
obliged  to  have  recourse  to  an  intermediary,  if  he 
does  not  desire  it.  Further,  the  stockbrokers 
were  subjected  to  several  regulations  with  a  view 
to  prevent  speculation  and  stock-jobbing.  Thus, 
they  were  obliged  to  keep  a  journal;  their  books 
were  to'  be  marked  and  signed  by  the  president 
of  the  Tribunal  de  Commerce;  they  could  not  trade 
nor  carry  on  banking  for  their  own  account;  no 
one  who  had  been  in  bankruptcy  was  allowed  to 
assume  the  duties  of  a  stockbroker. 

The  law  also  makes  the  stockbroker  responsible 
for  the  delivery  of  the  securities  sold  and  for  the 
payment  of  the  sums  stipulated,  even  before 
either  have  been  received  by  him  from  his  clients, 
his  security  being  appropriated  for  this  pledge 
if  need  be.     This  responsibility  was  intended  as 


392  THE  STOCK  EXCHANGE  FROM  WITHIN 

a  check  upon  transactions  for  future  delivery, 
which,  however,  were  made  legal  in  1885.*  This 
law  of  1 801,  it  will  be  observed,  provided  that 
stockbrokers  were  to  be  appointed  by  the  govern- 
ment, and  that  their  commissions  were  subject 
to  repeal.  In  1816  they  scored  a  great  advantage 
by  securing  the  enactment  of  a  rneasure  by  which 
they  were  permitted  to  introduce  their  successors 
with  the  consent  of  the  government.  This  "right 
of  introduction,"  says  M.  Vidal,  "is  practically 
an  article  for  sale.  The  stockbroker,  on  retiring, 
does  not  sell  his  office  (membership),  but  he  sells 
to  his  successor  the  right  of  introduction. " 

The  price  of  this  right  in  recent  years  has  varied 
from  1,500,000  to  2,000,000  francs  (^300,000  to 
^400,000).  A  candidate,  proving  satisfactory  to 
the  government,  must  in  addition  deposit  250,000 
francs  (^50,000)  as  a  bond  or  security "  to  the 
government,  which  pays  interest  on  the  deposit, 
and  120,000  francs  (^24,000)  as  a  fee  to  the 
caisse  commune  of  the  chamhre  syndicate,  which 
means  the  treasury  funds  of  the  institution. 
The  variations  in  the  price  of  the  "offices"  or 
mem.berships  have  an  interesting  history.  The 
first  office  sold  was  valued  at  30,000  francs;  about 
1830  they  rose  to  850,000  francs;  after  the  July 


*"The  History  and  Methods  of  the  Paris  Bourse,"  by  E.  Vidal,  Senate 
Document  No.  573,  Sixty-first  Congress  (Second  session),  pp.  161-2. 


THE  PARIS  BOURSE  393 

Revolution  they  fell  to  250,000  francs,  and  rose 
again  to  950,000  francs  before  1848.  They 
declined  at*  that  time  to  400,000  francs,  and  in 
1857  reached  2,400,000  francs.  After  the  war 
they  fell  to  1,400,000  francs.*  In  1898,  when  the 
number  of  Agents  de  Change  was  increased  from 
sixty  to  seventy  under  the  government's  reorgani- 
zation, designed  to  meet  the  expansion  in  business, 
it  was  provided  that  each  of  the  ten  new  members 
should  purchase  the  ofhces  from  the  old  members 
at  1,372,000  francs  each. 

While  the  stockbrokers,  as  I  shall  term  the 
Agents  de  Change  henceforth,  are  placed  by  law 
under  the  disciplinary  rule  of  the  Minister  of 
Finance,  they  themselves,  as  an  association, 
choose  by  ballot  a  governing  board  {chambre 
syndicate)  of  eight  of  their  members,  to  whom, 
with  a  chairman  (Syndic)  are  entrusted  the 
maintenance  of  discipline,  the  listing  of  securities, 
and  all  general  matters  concerning  the  welfare 
of  the  body. 

In  addition  to  the  exclusive  privileges  entrusted 
to  stockbrokers  as  already  cited,  they  are  consti- 
tuted the  sole  authority  for  the  quotations  of 
the  securities  in  which  they  deal,  including 
quotations  of  metals;  they  alone  give  the  necessary 
certificates  for  transfers  of  government  securities 

■*  "Operations  de  Bourse  et  de  Change,"  Courtois,  13th  ed.,  p.  239.  ' 


394  THE  STOCK  EXCHANGE  FROM  WITHIN 

on  terms  provided  by  law;  they  regulate  processes 
by  which  lost  or  stolen  certificates  are  rendered 
non-negotiable  or  restored  to  owners;  they  may 
be  commissioned  by  the  courts  to  negotiate  loans, 
to  liquidate  pledged  securities,  and  to  dispose  of 
the  property  of  minors.  Settlement  days  In 
Paris  are  similar  to  those  In  London,  occurring 
twice  a  month.  That  at  the  end  of  the  month 
lasts  five  days,  and  that  In  the  middle  of  the 
month  four  days.  French  rentes  are  settled 
only  at  the  end  of  the  month. 

In  forming  partnerships,  only  one  person  In 
the  firm  is  entitled  to  act  as  stockbroker;  the 
other  partners  must  be  simply  financial  partners, 
responsible  for  losses,  as  "special"  partners 
are  in  New  York,  to  the  extent  of  the  capital 
contributed.  The  holder  of  the  membership 
must  be  the  owner,  in  his  own  name,  of  at  least 
one  quarter  of  the  sum  representing  the  purchase 
price  of  his  membership,  plus  the  amount  of  the 
bond  or  security  given.  Stockbrokers  are  for- 
bidden by  law  to  disclose  the  name  of  any  person 
for  whom  they  buy  or  sell;  for  this  reason  all 
dealings  are  made  in  the  broker's  own  names,  as 
are  also  transfers.  They  must  not,  under  any 
circumstances,  carry  on  trading  or  banking  opera- 
tions for  their  own  account,  under  penalty  of 
expulsion.     The  bankruptcy  of  a  stockbroker  Is 


THE  PARIS  BOURSE  395 

prima  facie  a  fraudulent  bankruptcy,  rendering 
him  liable"  to  arrest  and  other  penalties,  even 
under  circumstances  where  an  outsider  would  be 
immune. 

While  the  impression  prevails  in  many  quarters 
that  members  of  the  Bourse  are  made  responsible 
by  law  for  any  liabilities  that  may  be  incurred 
by  their  colleagues,  such^  is  not  the  case.  The 
practice  is,  however,  that  the  chambre  syndicale, 
or  governing  body,  voluntarily  meets  the  liabilities 
of  defaulting  members  from  the  general  funds, 
although  not  compelled  to  do  so.  The  nature  of 
the  monopoly  which  stockbrokers  enjoy  in  Paris, 
and  their  position  as  officers  of  the  French  Execu- 
tive government,  renders  this  a  thoroughly  wise 
method,  for,  as  we  shall  presently  see,  there  is 
grave  opposition  to  the  exclusive  rights  entrusted 
to  them,  and  it  would  not  be  good  policy  to  fan 
the  flames  of  this  hostility  by  anything  less  than 
a  mutual  guarantee  of  solvency. 

Rates  of  commission  to  be  charged  by  stock- 
brokers on  the  Paris  Bourse  are  fixed  by  the  decree 
of  the  Minister  of  Finance  (July  22,  1901).  These 
are  the  minimum  charges,  and  no  stockbroker  is 
allowed  to  reduce  them  under  any  circumstances. 
He  may,  however,  and  usually  does,  share  them 
with     intermediates    who    bring    him    business. 

If  a  client  gives,  say,  an  order  to  buy  "at  the 


396  THE  STOCK  EXCHANGE  FROM  WITHIN 

average  price"  (cours  moyen),  the  transaction  takes 
place  in  this  way:  Before  the  opening  of  the 
session  the  stockbrokers  and  their  clerks  meet 
in  a  special  room,  where  bids  and  offers  are  made 
"at  the  average  price,"  which  is  as  yet  undeter- 
mined; it  will  be  decided  during  the  session. 
When  an  offer  and  a  bid  coincide,  the  transaction 
is  closed;  only  the  price  is  missing.  When  the 
bell  rings  to  announce  the  opening  of  the  market, 
the  brokers  and  their  clerks  leave  the  special  room 
and  proceed  to  the  public  hall  around  the  railed 
enclosure  {corheille)  whereupon  the  day's  business 
begins. 

As  orders  are  executed  the  dealer  gives  the 
price  to  a  marker,  whose  entries  establish  the 
prices  for  the  official  quotation  list,  and,  when  this 
has  been  made  up,  those  who  have  traded  on  the 
basis  of  "the  average  price  "ascertain  it  by  striking 
a  mean  between  the  high  and  low  level.  If  only 
one  price  is  quoted,  that,  of  course,  takes  the  place 
of  the  average  price.  If  orders  are  given  at  fixed 
prices,  or  "at  the  market,"  they  are  executed  as 
elsewhere.  It  is  important  to  note  in  this  connec- 
tion, that  the  market  in  Paris  enjoys  an  intimate 
connection  with  many  banks  and  credit  institu- 
tions that  act  as  intermediates  in  procuring 
business.  Orders  transmitted  to  the  Bourse 
by  the  Bank  of  France  in  1908,  for  account  of  its 


THE  PARIS  BOURSE  397 

clients,  amounted  to  98,721,  involving  500,000,000 
francs  capital. 

While,  as  we  have  seen,  stockbrokers  alone 
have  the  right  to  deal  in  government  and  other 
listed  securities,  there  are  very  many  securities 
dealt  in,  in  Paris,  that  have  not  been  admitted  to 
the  Official  List,  either  because  the  stockbrokers 
did  not  care  to  adopt  them  or  because  the  secu- 
rities did  not  fulfill  the  very  rigorous  statutory 
conditions.  These  may,  however,  be  dealt  in 
outside  the  Bourse,  and  the  law  recognizes  and 
protects  such  transactions.  In  what  I  have 
written  heretofore,  I  have  confined  myself  to  the 
operations  of  the  parquet,  meaning  the  stock- 
brokers market,  and  so  called  because  of  the 
parquet  floor  on  which  they  stand;  we  come  now 
to  the  dealings  on  the  coulisse,  or  curb,  named 
from  the  narrow  passageway,  la  coulisse,  in  which 
these  curb  brokers  congregate.  This  market  is 
called  "the  banker's  market"  {marche  en  hanque)^ 
but  for  our  purpose  we  may  call  these  dealers 
curb  brokers,  as  distinquished  from  the  stock- 
brokers of  the  parquet.*  The  number  of  curb 
brokers  is  not  limited;   any  one   may  become  a 


*  Provincial  bourses  in  France  are  divided  into  two  classes  —  those  with 
parquets,  and  those  without  them.  Bourses  with  parquets  are  those  at 
Lyons,  Bordeaux,  Marseilles,  Nantes,  Toulouse,  and  Lille.  The  Minister 
of  Finance  is  in  control  of  these  parquet  bourses,  while  the  Minster  of 
Commerce  controls  those  that  have  no  parquet. 


398  THE  STOCK  EXCHANGE  FROM  WITHIN 

coullssler  if  he  is  a  French  subject.  He  must 
have  a  capital  of  100,000  francs  in  order  to  do 
business  in  the  cash  market  for  rentes,  and  of 
500,000  francs  for  the  settlement  market.  The 
curb  is  governed,  as  is  the  parquet,  hy  two  cham- 
bres  syndicaie,  one  for  the  account,  and  one  for 
the  cash  market. 

Although  the  French  law  provides  that  dealings 
In  French  rentes  are  the  sole  prerogative  of  the 
monopoly  of  stockbrokers,  and  fixes  punishment 
for  any  Intrusion  into  that  field,  the  curb  brokers, 
as  a  matter  of  fact,  deal  extensively  and  openly 
in  rentes,  and  are  powerful  competitors  of  the 
stockbrokers.  Their  operations  are  not  valid, 
strictly  speaking,  but  they  are  tolerated  by  the 
government  for  the  reason  that  the  credit  of  the 
State  Is  benefited  by  making  the  market  for  rentes 
as  free  and  extensive  as  possible.  This  tacit  rec- 
ognition by  the  government,  of  the  fundamental 
law  of  economics  that  wide  and  unrestricted 
markets  are  the  best  markets,  would  seem  on  its 
face  to  raise  a  point  as  to  the  wisdom  of  a  system 
that  perpetuates  a  monopoly  of  seventy  stock- 
brokers. The  question  is  not. a  new  one;  it  has 
been  agitating  financial  Paris  for  years.  Monop- 
olies of  any  kind  are  not  considered  beneficial 
In  this  enlightened  age;  monopolies  that  make 
markets    and    establish    values    and    prices    are 


THE  PARIS  BOURSE  399 

peculiarly  abhorrent.  On  this  point  we  nnay 
quote  M.  Vidal,  the  author  of  a  brilliant  study 
on  this  subject: 

"The  actual  financial  power  of  the  Paris  stock- 
broker is  put  forward  as  an  argument,"  he  says, 
speaking  of  the  argument  in  favor  of  continuing 
the  monopoly,  "and  it  is  affirmed  that  our  finan- 
cial market  is  the  first  in  the  world.  In  our 
opinion,  even  granting  that  this  is  true,  which  is 
far  from  having  been  proven,  the  cause  is  con- 
founded with  the  effect.  When  a  country,  owing 
to  its  geographical  location,  its  climate,  and  the 
character  of  its  inhabitants,  possesses  numerous 
natural  riches,  and  even  moral  riches,  they  co- 
operate in  increasing  its  wealth;  when  it  has  the 
advantage  of  certain  political  and  economic  condi- 
tions, when  it  enjoys  a  monetary  and  commercial 
organization  which  promotes,  instead  of  paralyz- 
ing, human  activity  in  most  of  its  manifestations, 
then  that  country  is  rich  and  deserves  to  be  rich. 
And  it  may  then  happen  that  some  organi- 
zation, defective  in  itself,  and  the  source  of 
manifold  vexations,  is  nevertheless  prosperous,  as 
much  on  account  of  certain  facts  of  adaption  as 
because  it  unavoidably  lies  within  the  reach  of  the 
rays  of  national  wealth.     It  reflects  that  wealth. 

"But  the  Paris  Bourse  does  not  owe  its  pros- 
perity  to   its   organization.     Seventy   ministerial 


400  THE  STOCK  EXCHANGE  FROM  WITHIN 

appointees  entrusted  with  the  negotiation  of 
one  hundred  and  thirty  bilHons  of.  transfer- 
able securities  are  powerful  personalities.  They 
would  be  more  powerful  if  they  were  but 
thirty-five.  They  would  be  more  powerful  if 
there  were  but  twenty  of  them,  or  ten,  or  five, 
or  even  one,  if  there  were  in  the  market  but  one 
autocrat,  a  single  arbiter  of  securities,  centralizing 
bids  and  offers,  and  the  king  of  the  Bourse,  just 
as  we  see  in  America  an  oil  king  and  a  steel  king. 
In  such  a  case  the  soundness  of  a  market  is  more 
seeming  than  real.  If  that  system  had  been 
applied  to  provisions  and  merchandis'e,  infinitely 
more  necessary  for  consumption  than  rentes  or 
shares  in  companies,  the  market  for  wine,  bread, 
and  meat,  appropriated  by  a  few  barons,  might, 
perhaps,  be  stupendously  high,  but  in  this  respect 
experience  speaks  in  favor  of  freedom  of  trade  only. 
"It  seems,  therefore,  necessary  that  public  and 
private  credit  should  enjoy  the  benefit  of  an 
organization  more  pliable  and  more  in  harmony 
with  the  general  condition  of  a  country's  com- 
merce. Let  us  therefore  beware  of  mistaking  the 
appearance  of  force  for  force  itself  —  a  deception 
that  should  impress  us  no  more  than  the  sight  of 
the  effigies  of  iron-clad  warriors,  standing  on  rich 
trappings  in  a  military  museum.  If  our  financial 
market  were  opened  to  all  who  have  funds  and 


THE  PARIS  BOURSE  401 

understand  the  profession,  it  would  be  stronger 
still.  If  the  market's  favorable  situation  were 
distributed  among  several  hundred  Individuals, 
the  division  of  risks  would  render  the  market  more 
stable,  competition  would  secure  for  our  market 
the  desired  elasticity,  and,  If  wanted,  regulation 
under  the  supervision  of  the  Minister  of  Finance 
would  create  a  condition  halfway  between  un- 
limited freedom,  which,  with  more  or  less  reason, 
scares  so  many  people,  and  monopoly,  which  is 
an  old  outfit,  in  no  way  suiting  our  customs,  and 
disturbing  the  harmony  of  our  laws  without 
rendering  the  services  expected  from  it  ."* 

From  the  point  of  view  of  an  American  this 
would  seem  to  be  an  unanswerable  argument. 
If  seventy  men  are  constituted  sole  managers 
of  a  market  for  130,000,000,000  francs  of  trans- 
ferable securities,  one  of  two  things  Is  sure  to 
happen;  either  a  public  market  will  establish  Itself 
outside  these  seventy  men,  or  the  seventy  will 
prevent  the  establishment  of  the  public  market. 
The  first  of  these  alternatives  has  occurred  in  the 
establishment  of  the  coulisse;  the  second  would 
have  occurred  if  the  stockbrokers  could  have 
accom.plished  it. 

While    the   government  took   no    hand   in   the 


*  "History  and  Methods  of  the  Paris  Bourse,"  by  E.  Vidal,  published 
by  the  National  Monetary  Commission, Washington,  1910,  pp.  262-3-4. 


402  THE  STOCK  EXCHANGE  FROM  WITHIN 

matter,  It  was  recognized  that  the  coulisse 
gave  to  the  public  market  a  breadth  and  activ- 
ity that  did  great  good;  as  a  matter  of  fact 
it  benefited  the  stockbrokers  themselves  In 
a  large  way,  for  it  enabled  them  to  obtain 
from  the  government  liberties  not  formerly 
enjoyed,  but  practised  freely  by  the  coulisslers, 
such  as  transactions  in  time  bargains,  dealings  in 
foreign  securities,  and  similar  concessions.  This 
grant  of  a  right  to  do  business  on  time,  or  as  we 
term  it  "future  delivery,"  was  a  tremendous  step 
forward,  since  it  removed  an  obstacle  in  the  way 
of  large  speculative  markets  that  had  long  been 
abolished  In  other  financial  centres.  It  put  a 
stop  to  the  "welching"  of  speculators  on  the  plea 
of  the  gambling  act.  It  legalized  short  sales,  and 
it  established  a  distinct  advance  In  economic 
progress.  To  that  extent  the  stockbrokers  are 
Indebted  to  their  neighbors  on  the  curb.* 

*  The  report  of  the  Paris  Chamber  of  Commerce,  February  8,  1882, 
which  paved  the  way  for  this  reform,  is  interesting  reading: 

"An  administration  of  justice  which  would  permit  a  speculator  to  carry 
on  two  deals  of  equal  importance  with  two  different  brokers,  one  for  a  rise 
and  the  other  for  a  fall,  and,  while  collecting  from  one  the  profit  he  had 
made  to  advance  the  plea  of  gambling  toward  the  other,  in  order  to  avoid 
paying  the  loss  which  the  operation  showed  —  such  an  administration,  I 
say,  could  not  hold  any  longer;  that  fact  alone  would  condemn  it. 

"Experience  shows  that  the  plea  of  gambling  has  never  protected  any- 
body but  those  of  bad  faith,  and  has  only  encouraged  the  excess  of  specula- 
tion, as  was  stated  by  M.  Andrieux  in  his  report  presented  to  the  Chamber 
in  1877,  in  the  name  of  the  Seventh  Commission  of  Initiative. 

"Prompted  by  these  reasons,  and,  considering  that  the  present  legislation, 
far  from  preventing  gambling,  encourages  it;  considering  that  bad  faith 
finds  protection  in  the  jurisprudence  sanctioned;  and,  further  considering 


THE  PARIS  BOURSE  403 

Meanwhile,  the  opposition  to  the  monopoly 
of  the  stockbrokers  continues.  "At  all  times," 
says  M.  Vidal,  "whenever  there  have  been 
privileges,  some  men  have  been  found  to  oppose 
them.  Of  course,  these  men  are  not  theorists  or 
pedants;  they  are  simply  men  whom  this  or  that 
privilege  prevents  from  working  freely,  and  who 
represent  the  manifestation  of  that  mysterious 
force  of  things  which  tends  toward  freedom  of 
trade.  Commercial  law  owes  its  birth  only  to 
these  protestations  of  practical  men  in  apparent 
revolt  against  the  laws,  which  become  the  uncon- 
scious shapers  of  future  legislation.  From  the 
day  when  there  was  an  Agent  de  Change  there 
was  a  "coulissier. "  The  first  called  the  second 
a  thief,  because  he  encroached  upon  his  privilege. 
The  second  hurled  back  the  compliment,  because 
the  privilege  robbed  him  of  his  natural  right."* 

This  has  a  familiar  American  ring.  In  1843 
a  voluminous  report  to  the  Minister  of  Justice 
by  the    stockbrokers    asked  that  the  coulisse  be 


that  in  commercial  affairs,  as  in  any  other,  it  behooves  to  allow  every 
one  his  full  freedom,  as  well  as  to  hold  him  responsible  for  his  actions  — 
I  beg  to  suggest  that  an  address  be  sent  to  the  Minister  of  Commerce, 
confirming  the  letter  of  the  Chamber  of  Commerce  of  November  21;,  1877, 
and  requesting  the  Government  to  introduce  a  bill  in  the  Chambers,  declaring 
that  article  1965  of  the  Code  civil  does  not  apply  to  debts  resulting  from 
dealings  for  future  delivery,  and  that  articles  421  and  422  of  the  Code 
penal  are  repealed." 

The  law  legalizing  dealings  for  future  delivery  was  enacted  March  28, 
1885,  and  formally  promulgated  April  8,  1885. 

*  Vidal,  p.  217,  supra. 


404  THE  STOCK  EXCHANGE  FROM  WITHIN 

destroyed.  Nothing  came  of  it,  but  in  1859 
another  attempt  succeeded;  the  coulisse  was 
suppressed.  But  the  level  of  public  credit  which, 
it  was  hoped,  would  be  raised  by  the  suppression, 
actually  sank.  The  business  of  the  coulisse,  and 
the  market  it  created,  disappeared  with  the 
coulisse  itself.  The  government  was  very  sensi- 
tive then  as  now  in  the  matter  of  market  prices 
for  its  rentes,  and  after  the  laborious  process  of 
hoisting  them  to  71,  it  was  distressing  to  find  that, 
coincident  with  the  abolition  of  the  curb  market, 
they  had  fallen  to  69.  So,  in  1861,  the  coulisse 
was  permitted  to  reappear,  and  I  fancy  the  days 
of  its  suppression  are  now  at  an  end. 

But  the  old  hostility  will  break  out  again  when 
business  slackens,  for  the  French  have  a  saying 
that  "horses  fight  when  there  is  no  more  hay  in 
the-  manger. "  The  problem  is  a  pretty  one  from 
any  angle,  especially  from  the  standpoint  of  Ameri- 
can stockbrokers.  It  would  seem  plain  that  the 
monopoly,  as  such,  cannot  forever  continue,  yet 
the  government  faces  a  financial  power  of  tremen- 
dous strength  —  a  Frankenstein  which  the  State 
itself  has  created  —  "and  of  which,"  to  quote 
M.  Vidal,  "it  can  rid  itself  only  by  indemnifying 
it. "  At  the  present  time  the  70  memberships 
are  worth  96,000,000  francs  as  a  grand  total; 
meantime,  the   longer  the  problem  is  postponed 


THE  PARIS  BOURSE  405 

the  more  valuable  they  will  become  as  the  size 
and  importance  of  the  Paris  market  increases. 

"But  the  French  government  does  not  seem 
inclined  to  study  the  question  seriously;  first, 
because  the  stockbrokers  would  have  to  be  indem- 
nified; and,  secondly,  because  the  stockbrokers 
themselves  are  desirous  of  holding  on  to  their 
present  monopoly.  As  time  passes,  the  securities, 
continually  on  the  increase,  tend  to  increase  their 
profits.  A  financial  power  has  been  created  whose 
existence,  whose  ever  spreading  influence,  forms 
the  subject  of  a  serious  economic  problem,  which 
some  day  may  turn  out  to  be  an  even  more  serious 
political  problem.  "* 

It  is  interesting  to  note,  in  passing  from  this 
subject,  that  a  much  larger  business  is  done  in 
the  coulisse  than  in  the  parquet,  due  to  the  fact 
that  the  curb  brokers  are  not  restricted  in  their 
securities  as  are  the  stockbrokers.  The  market 
for  foreign  securities  alone,  on  the  curb,  has  made 
wealthy  men  of  many  of  the  coulissiers.  They 
publish  a  special  quotation  list,  and  while  they 
have  no  officially  fixed  commission  rates,  these 
are  established  by  custom  and  in  practical  opera- 
tion they  work  satisfactorily.  As  might  be 
expected,  the  curb  brokers  require  from  their 
customers    smaller   margins    than    those   exacted 

*  Ibid,  p.  276. 


4o6  THE  STOCK  EXCHANGE  FROM  WITHIN 

by  the  stockbrokers  —  another  reason  why  their 
business  is  large;  again,  the  clients  of  the  curb 
broker  may  attend  the  Bourse  with  him,  be 
present  and  confer  with  him  while  he  buys  or  sells 
for  them,  and  in  this  way  get  into  close  touch 
with  the  market,  a  privilege  not  so  easily  enjoyed 
by  the  client  of  the  stockbroker. 

The"  Official  Paris  Bourse  is  open  from  12  noon 
to  3  p.  M.;  the  coulisse  from  11 145  a.  m.  to  4  p.  m. 
The  Official  List  is  published  daily,  and  is  divided 
into  two  parts,  the  first  containing  a  full  list  of 
all  the  officially  listed  securities  and  of  the  dealings 
in  them,  and  the  second  part  a  list  of  the  dealings 
in  what  we  used  to  call  in  New  York  "the  unlisted 
department. "  Rates  of  Exchange,  prices  of  gold 
and  silver  bullion,  quotations  of  treasury  bonds, 
and  the  rates  of  the  Bank  of  France  for  discounts, 
interest,  and  loans,  are  also  included.  The  coulisse 
also  issues  a  list. 

The  volume  of  transferable  securities  in  nego- 
tiation through  the  medium  of  the  Paris  stock 
markets  was  estimated  by  JVT.  Alfred  Neymarck 
in  his  report  to  the  Institut  International  de 
Statistique,  session  of  1907,  at  155,000,000,000 
francs,  an  amount  slightly  in  excess  of  the  listed 
securities  on  the  New  York  Stock  Exchange. 
Of  this  total,  which  has  been  incre  sed  somewhat 
since  1907  through  the  admission  of  various  Rus- 


THE  PARIS  BOURSE  407 

sian  industrial  securities,  65,000,000,000  francs 
were  in  French  securities,  67,000,000,000  in 
foreign  securities  on  the  official  (parquet)  market, 
and  18,000,000,000  on  the  coulisse.  Of  home 
securities,  the  value  of  French  rentes  is  here 
estimated  at  24,000,000,000  francs,  of  bonds  of 
the  City  of  Paris,  of  treasury  bonds,  including 
those  of  the  department  and  colonies,  at  3,069,- 
000,000;  insurance  securities  at  702,000,000;  those 
of  the  Credit  Foncier  at  4,447,000,000;  of  banks 
and  credit  companies  at  3,101,000,000;  of  railroad 
and  navigation  companies  at  24,268,000,000;  of 
railways  and  tramways  at  2,200,000,000;  of  elec- 
tricity, iron  mills,  foundries,  and  coal  mines,  at 
2,463,000,000. 

Of  the  foreign  securities  in  the  French  market, 
Russian  securities  were  valued  at  10,000,000,000 
francs  in  1907,  although  they  are  to-day  consider- 
ably in  excess  of  that  sum;  divers  foreign  govern- 
ment funds  at  47,000,000,000  and  foreign  railway 
securities  at  6,000,000,000.* 

Next  to  London,  Paris  easily  leads  the  markets 
of  the  world  from  the  standpoint  of  power  and 
resources  in  an  international  sense.  It  is  the 
great  market  for  Russian  bonds  and  for  Russian 
industrials,  speculation  in  the  latter  having 
reached  such  volume  in  191 2  as  to  lay  the  French 

*  Ibid,  pp.  192-3. 


4o8  THE  STOCK  EXCHANGE  FROM  WITHIN 

public  open  to  the  charge  of  having  lost  its  head, 
something  that  has  not  occurred  in  France  since 
the  Panama  frenzy  of  1894.  France  also  holds 
most  of  the  Spanish  and  Portuguese  (3,500,000,000 
francs)  debt  and  has  large  capital  invested  in 
Egypt  and  the  Suez  Canal  (3,500,000,000  francs). 
Capital  investments  in  Roumania  and  Greece, 
Argentine,  Brazil  and  Mexico,  Tunis  and  the 
French  colonies,  Austria  and  Hungary,  Italy, 
China  and  Japan,  United  States  and  Canada, 
Great  Britain,  Belgium  and  Holland,  Germany, 
Turkey,  Servia  and  Bulgaria,  and  Switzerland, 
aggregate  16,150,000,000  francs,  distributed  in 
value  in  the  order  named. 

The  caution  of  French  investors  is  proverbial; 
notwithstanding  the  two  outbursts  of  imprudence 
that  have  occurred  in  this  generation,  it  is  difficult 
to 'induce  the  Frenchman  to  place  his  money  in 
anything  'not  a  safe  interest-yielding  security 
under  French  laws.  In  no  other  country  is 
investment  raised  to  a  higher  plane,  and  specu- 
lation confined  to  a  lower  one.  The  political 
nature  of  the  relationship  between  France  and 
Russia  has  resulted  from  time  time,  in  patriotic 
subscription  of  French  funds  to  Russian  govern- 
ment loans,  and  thence  to  Russian  industrials  of 
all  kinds,  but  the  latter  have  suffered  so  severely 
in  the  demxoralization  of  the  autumn  of  191 2  as 


THE  PARIS  BOURSE  409 

to  justify  the  prediction  that  their  popularity 
with  the  French  has  been  seriously  impaired. 

As  to  Russian  government  loans,  the  French 
investor  is  in  a  secure  position,  most  of  these 
issues  having  been  endorsed  by  such  powerful 
banks  as  the  Bank  of  France,  the  Credit  Lyonnais, 
the  Comptoir  d'  Escompte,  and  the  Societe  Gen- 
erale,  and,  indeed,  it  is  to  banks  such  as  these 
and  to  the  myriad  smaller  institutions  throughout 
the  country  that  investors  of  the  peasantry  and 
the  middle  classes  are  accustomed  to  turn  for 
advice  in  financial  matters.  The  large  speculative 
clientele,  as  we  know  it  in  America,  in  England, 
and  in  Germany,  is  a  decided  minority  in  France, 
and  those  who  indulge  freely  in  speculation  are 
canny  and  shrewd  beyond  their  fellows  in  other 
lands.  The  foresight  with  which  they  diagnosed 
the  events  of  the  Boer  War  in  1899,  and  the  celerity 
with  which  they  disposed  of  their  large  speculative 
holdings  of  South  African  mining  shares  at  top 
prices,  is  said  by  those  who  witnessed  it  to  have 
been  a  prodigy  of  speculative  skill. 

Like  all  other  careful  observers  French  econ- 
omists realize  in  a  large  sense  that  the  creation 
of  negotiable  instruments  and  their  distribution 
throughout  all  the  countries  of  the  world  through 
the  medium  of  the  Stock  Exchange  is  a  very  real 
cause  of  the  wealth  of  nations;  indeed,  this  point 


410  THE  STOCK  EXCHANGE  FROM  WITHIN 

seems  to  be  more  thoroughly  understood  and 
appreciated  by  the  mass  of  the  French  people 
than  by  the  public  elsewhere.  When,  in  1885, 
the  government  legalized  transactions  for  future 
delivery  and  thus  placed  transactions  in  securities 
in  the  same  category,  under  common  law,  with  all 
other  commercial  transactions,  it  established 
a  free  market  in  France  that  has  done  wonders 
for  the  credit  expansion  of  the  Republic  —  an 
expansion  likewise  due,  in  no  small  measure,  to 
the  growth  and  development  of  the  coulisse  and 
to  the  consequent  enlargement  of  a  market  that 
must  have  been  restricted,  of  necessity,  by  a 
too  rigorous  strengthening  of  the  stockbroker's 
monopoly.  In  a  word,  the  government,  by 
France,  of  credit  in  its  higher  forms,  clearly  rec- 
ognizes that  as  states,  railways,  and  industrial 
enterprises  have  need  to  resort  to  credit  through 
issues  of  securities,  a  wide  market  in  constant 
contact  with  sources  of  wealth  is  required,  and 
that  nothing  should  be  done  by  the  government 
to  interfere  with  the  ebb  and  flow  of  these  essential 
forces. 

"The  creating  and  successive  issuing  of  this 
mass  of  securities,"  to  quote  M.  Neymarck, 
"always  easy  to  purchase  and  to  sell  on  the 
Bourse,  have  been  the  real  cause  of  credit  expan- 
sion.    They  were  instrumental  in  accomplishing 


THE  PARIS  BOURSE  411 

real  marvels  In  France  and  abroad.  As  personal 
property  has- increased,  endeavors  have  been  made 
to  render  exchanges  easy,  and  to  make  transfers 
as  little  expensive  as  possible;  transferable  secu- 
rities, owing  to  their  denomination,  their  form, 
their  mode  of  maturity  for  the  payment  of  in- 
terest, their  conditions  for  redemption,  and  the 
ease  with  which  they  are  negotiated,  have  been 
brought  within  the  reach  of  all  purses,  and  have 
thus  developed  the  spirit  of  saving.  The  consoli- 
dation of  capital,  under  the  form  of  stock  com- 
panies, issuing  shares  and  bonds  that  everybody 
can  obtain,  encompasses  on  all  sides  the  civilized 
nations  of  the  world. 

"We  may  say,  with  Paul  Leroy-Beaulieu,  that 
now,  owing  to  capital  being  accumulated  in  the 
shape  of  negotiable  instruments,  it  is  the  stock 
company  which  takes  us  on  a  journey;  often  it 
provides  us  with  food  and  lodging,  sells  us  coal 
and  Hght,  makes  up  our  clothing,  and  even  sells 
it  to  us;  it  procures  news  for  us  and  inspires  our 
newspapers.  Further,  it  insures  our  lives  and 
our  dwellings;  it  feeds  the  unassuming  Parisian  in 
the  'Bouillons'  (cheap  cook-shops),  and  feasts  the 
stylish  Parisian  in  the  fashionable  wine  taverns. 

"The  distribution  of  all  these  securities  has 
materially  contributed  to  the  formation  of  small 
inheritances.     It  has  influenced  the  development 


412  THE  STOCK  EXCHANGE  FROM  WITHIN 

of  savings  institutions,  mutual  benefit  societies, 
pension  funds,  and  insurance;  it  has  thus  rendered 
invaluable  service  in  the  public  role  it  has  fulfilled. 
Thanks  to  it,  these  companies  multiply  and 
increase  as  the  capitalization  of  their  funds  is 
made  easier. 

"It  has  also  had  another  result.  It  has  shown 
that  there  is  no  longer  a  plutocracy,  but  a  veritable 
financial  democracy;  when  these  thousands  of 
millions  of  certificates  are  minutely  segregated, 
there  are  only  found  atoms  of  certificates  of 
stocks  and  bonds,  and  atoms  of  income  —  so 
great  is  the  number  of  capitalists  and  independent 
individuals  who  divide  these  securities  and  these 
incomes  among  themselves.  "* 

*  Remarks  of  M.  Alfred  Neymarck,  at  the  International  Congress  of 
Securities,  1900,  quoted  by  Vidal,  pp.  166-7. 


APPENDIX 

THE    REPORT    OF    THE    HUGHES    COMMISSION 
OF    1909 


APPENDIX 

REPORT 

OF    THE    governor's    COMMITTEE    ON    SPECULATION    IN    SECURITIES 
AND   COMMODITIES 

1909 

New  York,  June  7,  1909 
Hon.  Charles  E.  Hughes, 
Governor,  Albany,  N.  Y.: 

Dear  Sir:  The  committee  appointed  by  you  on  December   14, 
1908,  to  endeavor  to  ascertain 

"what  changes,  if  any,  are  advisable  in  the  laws  of  the  State  bear- 
ing upon  speculation  in  securities  and  commodities,  or  relating  to 
the  protection  of  investors,  or  with  regard  to  the  instrumentalities 
and  organizations  used  in  dealings  in  securities  and  commodities 
which  are  the  subject  of  speculation," 

beg  leave  to  submit  the  following  report : 

We  have  invited  statements  from  those  engaged  in  speculation 
and  qualified  to  discuss  its  phases;  we  have  taken  testimony  offered 
from  various  sources  as  to  its  objectionable  features;  we  have  con- 
sidered the  experience  of  American  States  and  of  foreign  countries 
in  their  efforts  to  regulate  speculative  operations.  In  our  inquiry 
we  have  been  aided  by  the  officials  of  the  various  exchanges,  who 
have  expressed  their  views  both  orally  and  in  writing,  and  have 
aflforded  us  access  to  their  records. 

THE  SUBJECT  IN  GENERAL 

Markets  have  sprung  into  being  wherever  buying  and  selling  have 
been  conducted  on  a  large  scale.  Taken  in  charge  by  regular  organi- 
zations and  controlled  by  rules,  such  markets  become  exchanges.  In 
New  York  City  there  are  two  exchanges  deahng  in  securities  and 
seven  in  commodities.  In  addition  there  is  a  security  market,  with- 
out fixed  membership  or  regular  officers,  known  as  the  "Curb." 
The  exchanges  dealing  in  commodities  are  incorporated,  while  those 
dealing  in  securities  are  not. 

41S 


41 6  THE  STOCK  EXCHANGE  FROM  WITHIN 

Commodities  are  not  held  for  permanent  investment,  but  are 
bought  and  sold  primarily  for  the  purpose  of  commercial  distribu- 
tion; on  the  other  hand,  securities  are  primarily  held  for  investment; 
but  both  are  subject  of  speculation.  Speculation  consists  in  fore- 
casting changes  of  value  and  buying  or  selling  in  order  to  take  ad- 
vantage of  them;  it  may  be  wholly  legitimate,  pure  gambling,  or 
something  partaking  of  the  qualities  of  both.  In  some  form  it  is  a 
necessary  incident  of  productive  operations.  When  carried  on  in 
connection  with  either  commodities  or  securities  it  tends  to  steady 
their  prices.  WTiere  speculation  is  free,  fluctuations  in  prices,  other- 
wise violent  and  disastrous,  ordinarily  become  gradual  and  com- 
paratively harmless.  Moreover,  so  far  as  commodities  are  con- 
cerned, in  the  absence  of  speculation,  merchants  and  manufacturers 
would  themselves  be  forced  to  carry  the  risks  involved  in  changes  of 
prices  and  to  bear  them  in  the  intensified  condition  resulting  from 
sudden  and  violent  fluctuations  in  value.  Risks  of  this  kind  which 
merchants  and  manufacturers  still  have  to  assume  are  reduced  in 
amount,  because  of  the  speculation  prevailing;  and  many  of  these 
milder  risks  they  are  enabled,  by  "hedging,"  to  transfer  to  others. 
For  the  merchant  or  manufacturer  the  speculator  performs  a  service 
which  has  the  effect  of  insurance. 

In  law,  speculation  becomes  gambling  when  the  trading  which  it 
involves  does  not  lead,  and  is  not  intended  to  lead,  to  the  actual 
passing  from  hand  to  hand  of  the  property  that  is  dealt  in.  Thus,  in 
the  recent  case  of  Hurd  vs.  Taylor  (i8i  N.  Y.,  231),  the  Court  of 
Appeals  of  New  York  said: 

"The  law  of  this  State  as  to  the  purchase  and  sale  of  stocks  is  well 
settled.  The  purchase  of  stocks  through  a  broker,  though  the  party 
ordering  such  purchase  does  not  intend  to  hold  the  stocks  as  an 
investment,  but  expects  the  broker  to  carry  them  for  him  with  the 
design  on  the  part  of  the  purchaser  to  seU  again  the  stocks  when 
their  market  value  has  enhanced  is,  however,  speculative,  entirely 
legal.  Equally  so  is  a  'short  sale,'  where  the  seller  has  not  the  stock 
he  assumes  to  sell,  but  borrows  it  and  expects  to  replace  it  when  the 
market  value  has  dechned.  But  to  make  such  transactions  legal, 
they  must  contemplate  an  actual  purchase  or  an  actual  sale  of 
stocks  by  the  broker,  or  through  him.  If  the  intention  is  that  the 
so-called  broker  shall  pay  his  customer  the  difference  between  the 
market  price  at  which  the  stocks  were  ordered  purchased  and  that 
at  which  they  were  ordered  sold,  in  case  fluctuation  is  in  favor  of  the 
costomer,  or  that  in  case  it  is  against  the  customer,  the  customer 
shall  pay  the  broker  that  difference,  no  purchases  or  sales  being  made, 
the  transaction  is  a  wager  and  therefore  illegal.  Such  business  is 
merely  gambling,  in  which  the  so-caUed  commission  for  purchases 
and  sales  that  are  never  made  is  simply  the  percentage  which  in  other 
gambling  games  is  reserved  in  favor  of  the  keeper  of  the  estabUsh- 
ment." 


APPENDIX  417 

This  is  also  the  law  respecting  commodity  transactions. 

The  rules  of  all  the  exchanges  forbid  gambling  as  defined  by  this 
opinion;  but  they  make  so  easy  a  technical  dcli\ery  of  the  property 
contracted  for,  that  the  practical  effect  of  much  speculation,  in  point 
of  form  legitimate,  is  not  greatly  different  from  that  of  gambling. 
Contracts  to  buy  may  be  privately  offset  by  contracts  to  sell.  The 
offsetting  may  be  done,  in  a  systematic  way,  by  clearing  houses,  or 
by  "ring  settlements."  Where  dehveries  are  actually  made,  property 
maj'  be  temporarily  borrowed  for  the  purpose.  In  tliese  ways, 
speculation  which  has  the  legal  traits  of  legitimate  deahng  may  go 
on  almost  as  freely  as  mere  wagering,  and  may  have  most  of  the 
pecuniary  and  immoral  eff'ects  of  gambling  on  a  large  scale. 

A  real  distinction  exists  between  speculation  which  is  carried  on 
by  persons  of  means  and  experience,  and  based  on  an  intelligent 
forecast,  and  that  whicii  is  carried  on  by  persons  without  these 
qualifications.  The  former  is  closely  connected  with  regular  business. 
While  not  unaccompanied  by  waste  and  loss,  this  speculation  accom- 
phshes  an  amount  of  good  which  ofi'sets  much  of  its  cost.  The  latter 
doe's  but  a  small  amount  of  good  and  an  almost  incalculable  amount 
of  evil.  In  its  nature  it  is  in  the  same  class  with  gambhng  upon  the 
race-track  or  at  the  roulette  table,  but  is  practised  on  a  vastly  larger 
scale.  Its  ramifications  extend  to  all  parts  of  the  country.  It 
involves  a  practical  certainty  of  loss  to  those  who  engage  in  it.  A 
continuous  stream  of  wealth,  taken  from  the  actual  capital  of  in- 
numerable persons  of  relatively  small  means,  swells  the  income  of 
brokers  and  operators  dependent  on  this  class  of  business;  and  in 
so  far  as  it  is  consumed  hke  most  income,  it  represents  a  waste  of 
capital.  The  total  amount  of  this  waste  is  rudely  indicated  by  the 
obvious  cost  of  the  vast  mechanism  of  brokerage  and  by  manipula- 
tors' gains,  of  both  of  which  it  is  a  large  constituent  element.  But 
for  a  continuous  influx  of  new  customers,  replacing  those  whose 
losses  force  them  out  of  the  "street,"  this  costly  mechanism  of  specu- 
lation could  not  be  maintained  on  anything  like  its  present  scale. 

THE   PROBLEM   TO   BE   SOLVED 

The  problem,  wherever  speculation  is  strongly  rooted,  is  to  elim- 
inate that  which  is  wasteful  and  morally  destructive,  while  retaining 
and  allowing  free  play  to  that  which  is  beneficial.  The  difficulty 
in  the  solution  of  the  problem  Ues  in  the  practical  impossibility  of 
distinguishing  what  is  virtually  gambling  from  legitimate  speculation. 
The  most  fruitful  policy  will  be  found  in  measures  which  will  lessen 
speculation  by  persons  not  qualified  to  engage  in  it.  In  carrying  out 
such  a  policy  exchanges  can  accomplish  more  than  legislatures.  In 
coimection  with  our  reports  on  the  dift"erent  exchanges,  as  well  as  on 
the  field  of  investment  and  speculation  which  lies  outside  of  the 
exchanges,  we  .shall  make  recommendations  directed  to  the  removal 


4i8  THE  STOCK  EXCHANGE  FROM  WITHIN 

of  various  evils  now  existing  and  to  the  reduction  of  the  volume  of 
speculation  of  the  gambling  type. 

THE  NEW  YORK  STOCK  EXCHANGE 

The  New  York  Stock  Exchange  is  a  voluntary  association,  limited 
to  I  ICO  members,  of  whom  about  700  are  active,  some  of  them  resi- 
dents of  other  cities.  Memberships  are  sold  for  about  $So,ooo. 
The  Exchange  as  such  does  no  business,  merely  providing  facilities 
to  members  and  regulating  their  conduct.  The  governing  power  is 
in  an  elected  committee  of  forty  members  and  is  plenary  in  scope. 
The  business  transacted  on  the  floor  is  the  purchase  and  sale  of  stocks 
and  bonds  of  corporations  and  governments.  Practically  all  trans- 
actions must  be  completed  by  delivery  and  payment  on  the  following 
day. 

The  mechanism  of  the  Exchange  provided  by  its  constitution  and 
rules,  is  the  evolution  of  more  than  a  century.  An  organization  of 
stockbrokers  existed  here  in  1792,  acquiring  more  definite  form  in 
181 7.  It  seems  certain  that  for  a  long  period  the  members  were 
brokers  or  agents  only;  at  the  present  time  many  are  principles  as 
well  as  agents,  trading  for  themselves  as  well  as  for  their  customers. 
A  number  of  prominent  capitalists  hold  memberships  merely  for  the 
purpose  of  availing  themselves  of  the  reduced  commission  charge 
which  the  rules  authorize  between  members. 

The  volume  of  transactions  indicates  that  the  Exchange  is  to-day 
probably  the  most  important  financial  institution  in  the  world. 
In  the  past  decade  the  average  annual  sales  of  shares  have  been 
196,500,000  at  prices  involving  an  annual  average  turnover  of  nearly 
$15,500,000,000;  bond  transactions  averaged  about  $800,000,000. 
This  enormous  business  affects  the  financial  and  credit  interests  of 
the'country  in  so  large  a  measure  that  its  proper  regulation  is  a  matter 
of  transcendent  importance.  While  radical  changes  in  the  mechan- 
ism, which  is  now  so  nicely  adjusted  that  the  transactions  are  carried 
on  with  the  minimum  of  friction,  might  prove  disastrous  to  the  whole 
coimtry,  nevertheless  measures  should  be  adopted  to  correct  existing 
abuses. 

PATRONS   OF   THE   EXCHANGE 

The  patrons  of  the  Exchange  may  be  divided  into  the  following 
groups: 

(i.)  Investors,  who  personally  examine  the  facts  relating  to  the 
value  of  securities  or  act  on  the  advice  of  reputable  and  experienced 
financiers,  and  pay  in  full  for  what  they  buy. 

(2.)  Manipulators,  whose  connection  with  corporations  issuing 
or  controlhng  particular  securities  enables  them  under  certain  cir- 
cumstances to  move  the  prices  up  or  down,  and  who  are  thus  in  some 
degree  protected  from  dangers  encountered  b}'  other  speculators. 

(3.)  Floor  traders,  who  keenly  study  the  markets  ^nd  the  general 


APPENDIX  41  g 

conditions  of  business,  and  acquire  early  information  concerning 
the  changes  which  affect  the  values  of  securities.  From  their  famili- 
arity with  the  technique  of  dealings  on  the  Exchange,  and  ability 
to  act  in  concert  with  others,  and  thus  manipulate  values,  they  are 
supposed  to  have  special  advantages  over  other  traders. 

(4.)  Outside  operators  having  capital,  experience,  and  knowledge 
of  the  general  conditions  of  business.  Testimony  is  clear  as  to  the 
result  which,  in  the  long  run,  attends  their  operations;  commissions 
and  interest  charges  constitute  a  factor  always  working  against  them. 
Since  good  luck  and  bad  luck  alternate  in  time,  the  gains  only  stimu- 
late these  men  to  larger  ventures,  and  they  persist  in  them  till  a 
serious  or  ruinous  loss  forces  them  out  of  the  "Street." 

(5.)  Inexperienced  persons,  who  act  on  interested  advice,  "tips," 
advertisements  in  newspapers,  or  circulars  sent  by  mail,  or  "take 
flyers"  in  absolute  ignorance,  and  with  bhnd  confidence  in  their 
luck.     Almost  without  exception  they  eventually  lose. 

CHAR.A.CTER   OF   TRANSACTIONS 

It  is  unquestionable  that  only  a  small  part  of  the  transactions  upon 
the  Exchange  is  of  an  investment  character;  a  substantial  part  may 
be  characterized  as  virtually  gambling.  Yet  we  are  unable  to  see 
how  the  State  could  distinguish  by  law  between  proper  and  improper 
transactions,  since  the  forms  and  the  mechanisms  used  are  identical. 
Rigid  statutes  directed  against  the  latter  would  seriously  interfere 
with  the  former.  The  experience  of  Germany  with  similar  legisla- 
tion is  illuminating.  But  the  Exchange,  with  the  plenary  power  over 
members  and  their  operations,  could  provide  correctives,  as  we  shall 
show. 

MARGIN   TRADING 

Purchasing  securities  on  margin  is  as  legitimate  a  transaction  as  a 
purchase  of  any  other  property  in  which  part  payment  is  deferred. 
We  therefore  see  no  reason  whatsoever  for  recommending  the  radical 
change  suggested,  that  margin  trading  be  prohibited. 

Two  practices  are  prolific  of  losses  —  namely,  buying  active  securi- 
ties on  small  margins  and  buying  unsound  securities,  paying  for  them 
in  full.  The  losses  in  the  former  case  are  due  to  the  quick  turns  in  the 
market,  to  which  active  stocks  are  subject;  these  exhaust  the  mar- 
gins and  call  for  more  money  than  the  purchasers  can  supply.  The 
losses  in  the  latter  case  are  largely  due  to  misrepresentations  of 
interested  parties  and  unscrupulous  manipulations. 

To  correct  the  evils  of  misrepresentation  and  manipulation,  we 
shall  offer  in  another  part  of  this  report  certain  recommendations. 
In  so  far  as  losses  are  due  to  insufiicient  margins,  they  would  be  ma- 
terially reduced  if  the  customary  percentage  of  margins  were  in- 
creased. The  amount  of  margin  which  a  broker  requires  from  a 
speculative  buyer  of  stocks  depends,  in  each  case,  on  the  credit  of 
the  buyer;   and  the  amount  of  credit  which  one  person  may  extend 


420  THE  STOCK  EXCHANGE  FROM  WITHIN 

to  another  is  a  dangerous  subject  on  which  to  legislate.  Upon  the 
other  hand,  a  rule  made  by  the  Exchange  could  safely  deal  with  the 
prevalent  rate  of  margins  required  from  customers.  In  preference, 
therefore,  to  recommending  legislation,  we  urge  upon  all  brokers  to 
discourage  speculation  upon  small  margins  and  upon  the  Exchange 
to  use  its  influence,  and,  if  necessary,  its  power,  to  prevent  members 
from  sohciting  and  generally  accepting  business  on  a  less  margin 
than  20  per  cent. 

PYRAMmiNG 

"Pyramiding,"  which  is  the  use  of  paper  profits  in  stock  transac- 
tions as  a  margin  for  further  commitments,  should  be  discouraged. 
The  practice  tends  to  produce  more  extreme  fluctuations  and  more 
rapid  wiping  out  of  margins.  If  the  stockbrokers  and  the  banks 
would  make  it  a  rule. to  value  securities  for  the  purpose  of  margin 
or  collateral,  not  at  the  current  price  of  the  moment,  but  at  the 
average  price  of,  say,  the  previous  two  or  three  months  (provided 
that  such  average  price  were  not  higher  than  the  price  of  the  mo- 
ment) ,  the  dangers  of  pyramiding  would  be  largely  prevented. 

SHORT  SELLING 

We  have  been  strongly  urged  to  advise  the  prohibition  or  limita- 
tion of  short  sales,  not  only  on  the  theory  that  it  is  wrong  to  agree 
to  sell  that  what  one  does  not  possess,  but  that  such  sales  reduce 
the  market  price  of  the  securities  involved.  We  do  not  think  that 
it  is  wrong  to  agree  to  sell  something  that  one  does  not  now  possess, 
but  expects  to  obtain  later.  Contracts  and  agreements  to  sell, 
and  deliver  in  the  future,  property  which  one  does  not  possess  at  the 
time  of  the  contract,  are  common  in  all  kinds  of  business.  The  man 
whohas  "sold  short"  must  some  day  buy  in  order  to  return  the  stock 
which  he  has  borrowed  to  make  the  short  sale.  Short  sellings  en- 
deavor to  select  times  when  prices  seem  high  in  order  to  sell,  and  times 
when  prices  seem  low  in  order  to  buy,  their  action  in  both  cases 
serving  to  lessen  advances  and  diminish  declines  of  price.  In  other 
words,  short  selling  tends  to  produce  steadiness  in  prices,  which  is 
an  advantage  to  the  community.  No  other  means  of  restraining 
unwarranted  marking  up  and  down  of  prices  has  been  suggested 
to  us. 

The  legislation  of  the  State  of  New  York  on  the  subject  of  short 
selling  is  significant.  In  181 2  the  Legislature  passed  a  law  declaring 
all  contracts  for  the  sale  of  stocks  and  bopds  void,  unless  the  seller 
at  the  time  was  the  actual  owner  or  assignee  thereof  or  authorized 
by  such  owner  or  assignee  to  sell  the  same.  In  1858  this  act  was 
repealed  by  a  statute  now  in  force,  which  reads  as  follows : 

"An  agreement  for  the  purchase,  sale,  transfer,  or  delivery  of  a 
certificate  or  other  evidence  of  debt,  issued  by  the  United  States 
or  by  any  State,  or  municipal  or  otbtr  corporation,  or  any  share  or 


APPENDIX  421 

interest  in  the  stock  of  any  bank,  corporation  or  joint-stock  asso- 
ciation, incorporated  or  organized  under  the  laws  of  the  United 
States  or  of  any  State,  is  not  void,  or  voidable,  because  the  vendor, 
at  the  time  of  making  such  contract,  is  not  the  owner  or  possessor 
of  the  certificate,  or  certificates,  or  other  evidence  of  debt,  share  or 
interest." 

It  has  been  urged  that  this  statute  "specifically  legalizes  stock 
gambhng."  As  a  matter  of  fact,  however,  the  law  would  be  precisely 
the  same  if  tliat  statute  were  repealed,  for  it  is  the  well-settled  com- 
mon law  of  this  country,  as  established  by  the  decisions  of  the 
Supreme  Court  of  the  United  States  and  of  the  State  courts,  that  all 
contracts,  other  than  mere  wagering  contracts,  for  the  future  pur- 
chase or  sale  of  securities  or  commod'ties  are  valid,  whether  the 
vendor  is,  or  is  not,  at  the  time  of  making  such  contract,  the  owner 
or  possessor  of  the  securities  or  commodities  involved,  in  the  absence 
of  a  statute  making  such  contracts  illegal.  So  far  as  any  of  these 
transactions  are  mere  wagering  transactions,  they  are  illegal,  and  not 
enforceable,  as  the  law  now  stands. 

It  has  been  suggested  to  us  that  there  should  be  a  requirement 
either  by  law  or  by  rule  of  the  Stock  Exchange,  that  no  one  should 
sell  any  security  without  identifying  it  by  a  number  or  otherwise. 
Such  a  rule  would  cause  great  practical  difliculties  in  the  case  of 
securities  not  present  in  New  York  at  the  time  when  the  owner 
desires  to  sell  them,  and  would  increase  the  labor  and  cost  of  doing 
business.  But  even  if  this  were  not  the  effect,  the  plan  contemplates 
a  restriction  upon  short  sales,  which,  for  the  reasons  set  forth  above, 
seems  to  us  undesirable.  It  is  true  that  this  identification  plan  exists 
in  England  as  to  sales  of  bank  shares  (Leeman  act  of  1867);  but  it 
has  proved  a  dead  letter.  It  has  also  been  used  in  times  of  appre- 
hended panic  upon  the  French  Bourse,  but  opinions  in  regard  to  its 
effect  there  are  conflicting.  While  some  contend  that  it  has  been 
useful  in  preventing  panics,  others  afiirm  that  it  has  been  used  simply 
for  the  purpose  of  protecting  bankers  who  are  loaded  down  with 
certain  securities  which  {hey  were  trjang  to  distribute,  and  who, 
through  political  influence,  procured  the  adoption  of  the  rule  for  their 
special  benefit.  , 

MANIPULATION   OF   PRICES 

A  subject  to  which  we  have  devoted  much  time  and  thought  is 
that  of  the  manipulation  of  prices  by  large  interests.  This  falls 
into  two  general  classes: 

(i.)  That  which  is  resorted  to  for  the  purpose  of  making  a  market 
for  issues  of  new  securities. 

(2.)  That  which  is  designed  to  serve  merely  speculative  purposes 
in  the  endeavor  to  make  a  profit  as  the  result  of  fluctuations  Vvhich 
have  been  planned  in  advance. 


422  THE  STOCK  EXCHANGE  FROM  WITHIN 

The  first  kind  of  manipulation  has  certain  advantages,  and  when 
not  accompanied  by  "matched  orders"  is  unobjectionable  per  se. 
It  is  essential  to  the  organization  and  carrying  through  of  important 
enterprises,  such  as  large  corporations,  that  the  organizers  should  be 
able  to  raise  the  money  necessary  to  complete  them.  This  can  be 
done  only  by  the  sale  of  securities.  Large  blocks  of  securities,  such 
as  are  frequently  issued  by  railroad  and  other  companies,  cannot  be 
sold  over  the  Counter  or  directly  to  the  ultimate  investor,  whose  con- 
fidence in  them  can,  as  a  rule,  be  only  gradually  established.  They 
must  therefore,  if  sold  at  all,  be  disposed  of  to  some  syndicate,  who 
wiU  in  turn  pass  them,  on  to  middlemen  or  speculators,  until,  in  the 
course  of  time,  they  find  their  way  into  the  boxes  of  investors.  But 
prudent  investors  are  not  Ukely  to  be  induced  to  buy  securities 
which  are  not  regularly  quoted  on  some  exchange,  and  which  they 
cannot  sell,  or  on  which  they  cannot  borrow  money  at  their  pleasure. 
If  the  securities  are  really  good  and  bids  and  offers  bona  fide,  open  to 
all  sellers  and  buyers,  the  operation  is  harmless.  It  is  merely  a 
method  of  bringing  new  investments  into  public  notice. 

The  second  kind  oi  manipulation  mentioned  is  undoubtedly  open 
to  serious  criticism.  It  has  for  its  object  either  the  creation  of  high, 
prices  for  particular  stocks,  in  order  to  draw  in  the  pubUc  as  buyers 
and  to  unload  upon  them  the  holdings  of  the  operators,  or  to  depress 
the  prices  and  induce  the  public  to  sell.  There  have  been  instances 
of  gross  and  unjustifiable  manipulation  of  securities,  as  in  the  case 
of  American  Ice  stock.  While  we  have  been  unable  to  discover  any 
complete  remedy  short  of  abolishing  the  Stock  Exchange  itself,  we 
are  convinced  that  the  Exchange  can  prevent  the  worst  forms  of 
this  evil  by  exercising  its  influence  and  authority  over  the  members 
to  prevent  them.  \\  hen  continued  manipulation  exists  it  is  patent 
to  experienced  obser\^ers. 

"wash  sales"  and  "matched  orders" 

In  the  foregoing  discussion  we  ha\'e  confined  ourselves  to  bona 
fide  sales.  So  far  as  manipulation  of  either  class  is  based  upon 
fictitious  so-called  "wash  sales,"  it  is  open  to  the  severest  condem- 
nation, and  should  be  prevented  by  all  possible  means.  These 
fictitious  sales  are  forbidden  by  the  rules  of  aH  the  regular  exchanges, 
and  are  not  enforceable  at  law.  They  are  less  frequent  than  many 
persons  suppose.  A  transaction  must  take  place  upon  the  floor  of 
the  Exchange  to  be  reported,  and  if  not  reported  does  not  serve  the 
purpose  of  those  who  engage  in  it.  If  it  takes  place  on  the  floor  of 
the  Exchange,  but  is  purely  a  pretence,  the  brokers  involved  run  the 
risk  of  detection  and  expulsion,  which  is  to  them  a  sentence  of  financial 
death.  There  is,  however,  another  class  of  transactions  called 
"matched  orders,"  which  differ  materially  from  those  already  men- 
tioned, in  that  they  are  actual  and  enforceable  contracts.  We  refer 
to  that  class  of  transactions,  engineered  by  some  manipulator,  who 
sends  a  number  of  orders  simultaneously  to  different  brokers,  sow^ 


APPENDIX  423 

to  buy  and  some  to  sell.  These  brokers,  without  knowing  that  other 
brokers  have  counter\'aiIing  orders  from  the  same  principal,  execute 
their  orders  upon  the  floor  of  the  Exchange,  and  the  transactions 
become  binding  contracts;  they  cause  an  appearance  of  activity  in 
a  certain  security  which  is  unreal.  Since  they  are  legal  and  bind- 
ing, we  find  a  difficulty  in  suggesting  a  legislative  remedy.  But 
where  the  activities  of  two  or  more  brokers  in  certain  securities  be- 
come so  extreme  as  to  indicate  manipulation  rather  than  genuine 
transactions,  the  officers  of  the  Exchange  would  be  remiss  unless 
they  exercised  their  influence  and  authority  upon  such  members  in 
a  way  to  cause  them  to  desist  from  such  suspicious  and  undesirable 
activity.  As  already  stated,  instances  of  continuous  mani])ulation 
of  particular  securities  are  patent  to  every  experienced  observer, 
and  could  without  difficulty  be  discouraged,  if  not  prevented,  by 
prompt  action  on  the  part  of  the  Exchange  authorities. 


The  subject  of  corners  in  the  stock  market  has  engaged  our  atten- 
tion. The  Stock  Exchange  might  properly  adopt  a  rule  providing 
that  the  governors  shall  have  power  to  decide  when  a  corner  exists 
and  to  fix  a  settlement  price,  so  as  to  relieve  innocent  persons  from 
the  injury  or  ruin  which  may  result  therefrom.  The  mere  existence 
of  such  a  rule  would  tend  to  prevent  corners. 

FAILURES   AND   EXAMINATION   OF   BOOKS 

We  have  taken  testimony  on  the  subject  of  recent  failures  of 
brokers,  where  it  has  been  discovered  that  they  were  insolvent  for 
a  long  period  prior  to  their  public  declaration  of  failure,  and  where 
their  activities  after  the  insolvency  not  only  caused  great  loss  to  their 
customers,  but  also,  owing  to  their  efforts  to  save  themselves  from 
bankruptcy,  worked  great  injury  to  innocent  outsiders.  For  cases 
of  this  character,  there  should  be  a  law  analogous  to  that  forbidding 
banks  to  accept  deposits  after  insolvency  is  known;  and  we  recom- 
mend a  statute  making  it  a  misdemeanor  for  a  broker  to  receive  any 
securities  or  cash  from  any  customer  (except  in  Uquidating  or  fortify- 
ing an  existing  account),  or  to  make  any  further  purchases  or  sales 
for  his  own  account,  after  he  has  become  insolvent;  with  the  pro- 
vision that  a  broker  shall  be  deemed  insolvent  when  he  has  on  his 
books  an  account  or  accounts  which,  if  liquidated,  would  exhaust 
his  assets,  unless  he  can  show  that  he  had  reasonable  ground  to 
believe  that  such  accounts  were  good. 

The  advisabiUty  of  requiring  by  State  authority  an  examination 
of  the  books  of  all  members  of  the  Exchange,  analogous  to  that  re- 
quired of  banks,  has  been  urged  upon  us.  Doubtless  some  failures 
would  be  prevented  by  such  a  system  rigidly  enforced,  although 
bank  failures  do  occur  in  spite  of  the  scrutiny  of  the  examiners. 
Yet  the  relations  between  brokers  and  their  customers  are  of  so  con- 


424  THE  STOCK  EXCHANGE  FROM  WITHIN 

fidential  a  nature  that  we  do  not  recommend  an  examination  of  their 
books  by  any  public  authority.  The  books  and  accounts  of  the 
members  of  the  Exchange,  should,  however,  be  subjected  to  periodic 
examination  and  inspection  pursuant  to  rules  and  regulations  to  be 
prescribed  by  the  Exchange,  and  the  result  should  be  promptly 
reported  to  the  governors  thereof. 

It  is  vain  to  say  that  a  body  possessing  the  powers  of  the  board 
of  governors  of  the  Exchange,  familiar  with  every  detail  of  the 
mechanism,  generally  accjuainted  with  the  characteristics  of  mem- 
bers, cannot  improve  present  conditions.  It  is  a  deplorable  fact 
that  with  all  their  power  and  ability  to  be  informed,  it  is  generally 
only  after  a  member  or  a  firm  is  overtaken  b}^  disaster,  involving 
scores  or  hundreds  of  innocent  persons,  and  causing  serious  disturb- 
ances, that  the  Exchange  authorities  take  action.  No  complaint 
can  be  registered  against  the  severity  of  the  punishment  then  meted 
out;  but  in  most  cases  the  wrongdoing  thus  atoned  for,  which  has 
been  going  on  for  a  considerable  period,  might  have  been  discovered 
under  a  proper  system  of  supervision,  and  the  vastly  preponderant 
value  of  prevention  over  cure  demonstrated. 

EEEYPOTHEC.'VTION   OF   SECURITIES 

We  have  also  considered  the  subject  of  rehj'pothecating,  loaning, 
and  other  use  of  securities  by  brokers  who  hold  them  for  customers. 
So  far  as  any  broker  applies  to  his  own  use  any  securities  belonging 
to  a  customer,  or  hypothecates  them  for  a  greater  amount  than  the 
unpaid  balance  of  the  purchase  price,  without  the  customer's  con- 
sent, he  is  undoubtedl}'  guilty  of  a  conversion  under  the  law  as  it 
exists  to-day,  and  we  call  this  fact  to  the  attention  of  brokers  and 
the  public.  \\Tien  a  broker  sells  the  securities  purchased  for  a  cus- 
tomer who  has  paid  therefor  in  whole  or  in  part,  except  upon  the 
customer's  default,  or  disposes  of  them  for  his  own  benfit,  he  should 
be  held  guilty  of  larceny,  and  we  recommend  a  statute  to  that  effect. 

DEALING   FOR   CLERXS 

The  Exchange  now  has  a  rule  forbidding  any  member  to  deal  or 
cany'  an  account  for  a  clerk  or  employee  of  any  other  member. 
This  rule  should  be  extended  so  as  to  prevent  dealing  for  account 
of  any  clerk  or  subordinate  employee  of  any  bank,  trust  company,  in- 
surance company,  or  other  moneyed  corporation  or  banker. 

LISTING   REQUIREMENTS 

Before  securities  can  be  bought  and  sold  on  the  Exchange,  they 
must  be  examined.  The  committee  on  Stock  List  is  one  of  the  most 
important  parts  of  the  organization,  since  pubhc  confidence  depends 
upon  the  honesty,  impartiahty,  and  thoroughness  of  its  work.     While 


APPENDIX  425 

the  Exchange  does  not  guarantee  the  character  of  any  securities,  or 
aftirm  that  the  statements  filed  by  the  promoters  are  true,  it  certifies 
that  due  dihgence  and  caution  have  been  used  by  ex[)erienced  men 
in  examining  them.  Admission  to  the  Hst,  therefore,  establishes  a 
presumption  in  favor  of  the  soundness  01  the  security  so  admitted. 
Any  securities  authorized  to  be  bought  and  sold  on  the  Exchange, 
which  have  not  been  subjected  to  such  scrutiny,  are  said  to  be  in  the 
unlisted  department,  and  traders  who  deal  in  them  do  so  at  their 
own  risk.  We  have  given  consideration  to  the  subject  of  verifying 
the  statements  of  fact  contained  in  the  papers  filed  with  the  appHca- 
tions  for  listing,  but  we  do  not  recommend  that  either  the  State  or 
the  Exchange  take  such  responsibility.  Any  attempt  to  do  so  would 
undoubtedly  give  the  securities  a  standing  in  the  eyes  of  the  public 
which  would  not  in  all  cases  be  justified.  In  our  judgment,  the 
Exchange,  should,  however,  adopt  methods  to  compel  the  filing  of 
frequent  statements  of  the  financial  condition  of  the  companies  whose 
securities  are  listed,  including  balance  sheets,  income  and  expense 
accounts,  etc.,  and  should  notify  the  public  that  these  are  open  to 
examination  under  proper  rules  and  regulations.  The  Exchange 
shoidd  also  require  that  there  be  filed  with  future  applications  for 
listing  a  statement  of  what  the  capital  stock  of  the  company  has  been 
issued  for,  showing  how  much  has  been  issued  for  cash,  how  much  for 
property,  with  a  description  of  the  property,  etc.,  and  also  showing 
what  commission,  if  any,  has  been  paid  to  the  promoters  or  vendors. 
Furthermore,  means  should  be  adopted  for  holding  those  making 
the  statements  responsible  for  the  truth  thereof.  The  unlisted  de- 
partment, except  for  temporary  issues,  should  be  abolished. 

FICTITIOUS   TRADES 

Complaint  is  made  that  orders  given  by  customers  are  sometimes 
not  actually  executed,  although  so  reported  by  the  broker.  We 
recommend  the  passage  of  a  statute  providing  that,  in  case  it  is 
pleaded  in  any  suit  by  or  against  a  broker  that  the  purchase  or  sale 
was  fictitious,  or  was  not  an  actual  bona  fide  purchase  or  sale  by  the 
broker  as  agent  for  the  customer,  the  court  or  jury  shall  make  a 
special  finding  upon  that  fact.  In  case  it  is  found  that  the  purchase 
or  sale  was  not  actual  and  bona  fide  the  customer  shall  recover  three 
times  the  amount  of  the  loss  which  he  sustained  thereby;  and  copies 
of  the  finding  shall  be  sent  to  the  district  attorney  of  the  county 
and  to  the  Exchange,  if  the  broker  be  a  member. 

UNIT  OF   TRADING 

The  Exchange  should  insist  that  all  trading  be  done  on  the  basis 
of  a  reasonably  small  unit  (say  100  shares  of  stock  or  $1000  of  bonds), 
and  should  not  permit  the  offers  of  such  lots,  or  bids  for  such  lots, 
to  be  ignored  by  traders  offering  or  bidding  for  larger  amounts. 
The  practice  now  permitted  of  allowing  bids  and  offers  for  large 


426  THE  STOCK  EXCHANGE  FROM  WITHIN 

amounts,  all  or  none,  assists  the  manipulation  of  prices.  Thus  a 
customer  may  send  an  order  to  sell  loo  shares  of  a  particular  stock 
at  par,  and  a  broker  may  offer  to  buy  looo  shares,  all  or  none,  at 
loi,  and  yet  no  transaction  take  place.  The  bidder  in  such  a  case 
should  be  required  to  take  all  the  shares  offered  at  the  lower  price 
before  bidding  for  a  larger  lot  at  a  higher  price.  This  would  tend  to 
prevent  matched  orders. 


STOCK   CLEARING  HOUSE 

We  have  also  considered  the  subject  of  the  Stock  Exchange  Clear- 
ing House.  While  it  is  undoubtedly  true  that  the  clearing  of  stocks 
facilitates  transactions  which  may  be  deemed  purely  manipulative, 
or  virtually  gambling  transactions,  nevertheless  we  are  of  the  opinion 
that  the  Exchange  could  not  do  its  necessary  and  legitimate  business 
but  for  the  existence  of  the  clearing  system,  and,  therefore,  that  it  is 
not  wise  to  abolish  it. 

The  transactions  in  stocks  which  are  cleared  are  transcribed  each 
day  on  what  are  called  "clearing  sheets,"  and  these  sheets  are  passed 
into  the  Clearing  House  and  there  filed  for  one  week  only.  In  view 
of  the  value  of  these  sheets  as  proving  the  transactions  and  the  prices, 
they  should  be  preserved  by  the  Exchange  for  at  least  six  years,  and 
should  be  at  the  disposal  of  the  courts,  in  case  of  any  dispute. 

SPECIALISTS 

We  have  received  complaints  that  specialists  on  the  floor  of  the 
Exchange,  dealing  in  inactive  securities,  sometimes  buy  or  sell  for 
their  own  account  while  acting  as  brokers.  Such  acts  without  the 
principal's  consent  are  illegal.  In  every  such  case  recourse  may  be 
had  to  the  courts. 

Notwithstanding  that  the  system  of  dealing  in  specialties  is  sub- 
ject to  abuses,  we  are  not  convinced  that  the  English  method  of 
distinguishing  between  brokers  and  jobbers  serves  any  better  purpose 
than  our  own  practice,  while  its  introduction  here  would  complicate 
business.  It  should  also  be  noted  that  the  practice  of  specialists 
in  buying  and  selling  for  their  own  account  often  serves  to  create  a 
market  where  otherwise  one  would  not  exist. 


BRANCH   OFFICES 

Complaint  has  been  made  of  branch  offices  in  the  city  of  New  York, 
often  luxuriously  furnished  and  sometimes  equipped  with  lunch 
rooms,  cards,  and  liquor.  The  tendency  of  many  of  them  is  to  in- 
crease the  lure  of  the  ticker  by  the  temptation  of  creature  comforts, 
appealing  thus  to  many  who  would  not  otherwise  speculate.  The 
governors  of  the  Exchange  inform  us  that  they  reahze  that  some  of 


APPENDIX  427 

these  oflBces  have  brought  discredit  on  the  Exchange,  and  that  on 
certain  occasions  they  have  used  their  powers  to  suppress  objection- 
able features.  It  seems  to  us  that  legitimate  investors  and  specula- 
tors might,  without  much  hardship,  be  compelled  to  do  business  at 
the  main  offices,  and  that  a  hard-and-fast  rule  against  all  branch 
offices  in  the  city  of  New  York  might  well  be  adopted  by  the  Ex- 
change. In  any  event,  we  are  convinced  that  a  serious  and  effective 
regulation  of  these  branch  otlices  is  desirable. 


INCORPORATION  OF  EXCHANGE 

We  have  been  strongly  urged  to  recommend  that  the  Exchange  be 
incorporated  in  order  to  bring  it  more  completely  under  the  authority 
and  supervision  of  the  State  and  the  process  of  the  courts.  Under 
existing  conditions,  being  a  voluntary  organization,  it  has  almost 
unlimited  power  over  the  conduct  of  its  members,  and  it  can  subject 
them  to  instant  discipline  for  wrongdoing,  which  it  could  not  exercise 
in  a  summary  manner  if  it  were  an  incorporated  body.  We  think 
that  such  power  residing  in  a  properly  chosen  committee  is  distinctly 
advantageous.  The  submission  of  such  questions  to  the  courts 
would  involve  delays  and  technical  obstacles  which  would  impair 
discipline  without  securing  any  greater  measure  of  substantial 
justice.  While  this  committee  is  not  entirely  in  accord  on  this 
point,  no  member  is  yet  prepared  to  advocate  the  incorporation 
of  the  Exchange  and  a  majority  of  us  advise  against  it,  upon  the 
ground  that  the  advantages  to  be  gained  by  incorporation  may  be 
accomplished  by  rules  of  the  Exchange  and  by  statutes  aimed  directly 
at  the  evils  which  need  correction. 

The  Stock  Excliange  in  the  past,  although  frequently  punishinfi; 
infractions  of  its  rules  with  great  severity,  has,  in  our  opinion,  at 
times  failed  to  take  proper  measures  to  prevent  wrongdoing.  This 
has  been  probably  due  not  only  to  a  conservative  unwillingness  to 
interfere  in  the  business  of  others,  but  also  to  a  spirit  of  comradeship 
which  is  very  marked  among  brokers,  and  frequently  leads  them  to 
overlook  misconduct  on  the  part  of  fellow-members,  although  at  the 
same  time  it  is  a  matter  of  cynical  gossip  and  comment  in  the  street. 
The  public  has  a  right  to  expect  something  more  than  this  from  the 
Exchange  and  its  members.  This  committee,  in  refraining  from 
advising  the  incorporation  of  the  Exchange,  does  so  in  the  expectation 
that  the  Exchange  will  in  the  future  take  full  advantage  of  the  powers 
conferred  upon  it  by  its  voluntary  organization,  and  will  be  active 
in  preventing  wrongdoing  such  as  has  occurred  in  the  past.  Then 
we  believe  that  there  will  be  no  serious  criticism  of  the  fact  that  it 
is  not  incorporated.  If,  however,  wrongdoing  recurs,  and  it  should 
appear  to  the  public  at  large  that  the  Exchange  has  been  derelict  in 
exerting  its  powers  and  authority  to  prevent  it,  we  believe  that  the 
public  will  insist  upon  the  incorporation  of  the  Exchange  and  its 
subjection  to  State  authority  and  supervision. 


428  THE  STOCK  EXCHANGE  FROM  WITHIN 

WALL   STREET   AS   A  FACTOR 

There  is  a  tendency  on  the  part  of  the  pubUc  to.  consider  Walt 
Street  and  the  New  York  Stock  Exchange  as  one  and  the  same  thing. 
This  is  an  error  arising  from  their  location.  We  have  taken  pains 
to  ascertain  what  proportion  of  the  business  transacted  on  the  Ex- 
change is  furnished  by  New  York  City.  The  only  reliable  sources 
of  information  are  the  books  of  the  commission  houses.  An  investi- 
gation was  made  of  the  transactions  on  the  Exchange  for  a  given  day, 
when  the  sales  were  1,500,000  shares.  The  returns  showed  that  on 
that  day  52  per  cent,  of  the  total  transactions  on  the  Exchange 
apparently  originated  in  New  York  City,  and  48  per  cent,  in  other 
locaUties. 

THE  CONSOLIDATED  STOCK  EXCHANGE 

The  Consolidated  Exchange  was  organized  as  a  mining  stock 
exchange  in  1875,  altering  its  name  and  business  in  1886.  Although 
of  far  less  importance  than  the  Stock  Exchange,  it  is  nevertheless 
a  secondary  market  of  no  mean  proportions;  by  far  the  greater  part 
of  the  trading  is  in  securities  listed  upon  the  main  exchange,  and  the 
prices  are  based  upon  the  quotations  made  there.  The  sales  average 
about  45 ,000,000  shares  per  annum.  The  fact  that  its  members  make 
a  specialty  of  "broken  lots,"  i.  e.,  transactions  in  shares  less  than  the 
100  unit,  is  used  as  a  ground  for  the  claim  that  it  is  a  serviceable 
institution  for  investors  of  relatively  small  means.  But  it  is  obvious 
that  its  utility  as  a  provider  of  capital  for  enterprises  is  exceedingly 
limited;  and  that  it  affords  facihties  for  the  most  injurious  form  of 
speculation  —  that  which  attracts  persons  of  small  means. 

It  also  permits  dealing  in  shares  not  listed  in  the  main  exchange, 
and. in  certain  mining  shares,  generally  excluded  from  the  other. 
In  these  cases  it  prescribed  a  form  of  listing  requirements,  but  the 
original  listing  of  securities  is  very  rarelj'  availed  of.  The  rules  also 
provide  for  dealing  in  grain,  petroleum,  and  other  products.  Wheat 
is,  however,  at  present  the  only  commodity  actively  dealt  in,  and 
this  is  due  solely  to  the  permission  to  trade  in  smaller  lots  than  the 
Produce  Exchange  unit  of  5000  bushels. 

There  are  1225  members,  about  450  active,  and  memberships 
have  sold  in  recent  years  at  from  $650  to  $2000.  In  general  the 
methods  of  conducting  business  are  similar  to  those  of  the  larger  ex- 
change, and  subject  to  the  same  abuses. 

Very  strained  relations  have  existed  between  the  two  security 
exchanges  since  the  lesser  one  undertook  in  1886  to  deal  in  stocks. 
The  tension  has  been  increased  by  the  methods  by  which  the  Con- 
solidated obtains  the  quotations  of  the  other,  through  the  use  of  the 
"tickers"  conveying  them.  It  is  probable  that  without  the  use  of 
these  instruments  the  business  of  the  Consolidated  Exchange  would 
be  paralyzed;  yet  the  right  to  use  them  rests  solely  upon  a  technical 
point  in  a  judicial  decision  which  enjoins  their  removal. 


APPENDIX  429 

COGNATE  SUBJECTS 

HOLDING   COMPANIES 

Connected  with  operations  on  the  Slock  Exchange  are  a  class  of 
manipulations  originating  elsewhere.  The  values  of  railway  se- 
curities, for  example,  depend  upon  the  management  of  the  companies 
issuing  them,  the  directors  of  which  may  use  their  power  to  increase, 
diminish,  or  even  extinguish  them,  while  they  make  gains  for  them- 
selves by  operations  on  the  Exchange.  They  may  advance  the  price 
of  a  stock  by  an  unexpected  dividend,  or  depress  it  by  passing  an 
expected  one.  They  may  water  a  stock  by  issuing  new  shares,  with 
no  proportionate  addition  to  the  productive  assets  of  the  company, 
or  load  it  with  indebtedness,  putting  an  unexpected  lien  on  the  share- 
holders' property.  Such  transactions  afifect  not  only  the  fortunes 
of  the  shareholders,  who  are  designedly  kept  in  ignorance  of  what 
is  transpiring,  but  also  the  value  of  investments  in  other  similar 
companies  the  securities  of  which  are  affected  sympathetically. 
Railroad  wrecking  was  more  common  in  the  last  half-century  than 
it  is  now,  but  we  have  some  glaring  examples  of  it  in  the  debris 
of  our  street  railways  to-day. 

The  existence  and  misuse  of  such  powers  on  the  part  of  directors 
are  a  menace  to  corporate  property  and  a  temptation  to  officials 
who  are  inclined  to  speculate,  leading  them  to  manage  the  property 
so  as  to  fill  their  own  pockets  by  indirect  and  secret  methods. 

A  holding  company  represents  the  greatest  concentration  of  power 
in  a  body  of  directors  and  the  extreme  of  helplessness  on  the  part  of 
shareholders.  A  corporation  may  be  so  organized  that  its  bonds 
and  preferred  stock  represent  the  greater  part  of  its  capital,  while 
the  common  stock  represents  the  actual  control.  Then,  if  a  second 
company  acquires  a  majority  of  the  common  stock,  or  a  majority 
of  the  shares  that  are  likely  to  be  voted  at  elections,  it  may  control 
the  former  company,  and  as  many  other  companies  as  it  can  secure. 
The  shareholders  of  the  subsidiary  companies  may  be  thus  prac- 
tically deprived  of  power  to  protect  themselves  against  injurious 
measures  and  even  to  obtain  information  of  what  the  holding  com- 
pany is  doing,  or  intends  to  do,  with  their  property. 

As  a  first  step  toward  mitigating  this  evil  we  suggest  that  the  share- 
holders of  subsidiary  companies,  which  are  dominated  by  holding 
companies,  or  voting  trusts,  shall  have  the  same  right  to  examine  the 
books,  records,  and  accounts  of  such  holding  companies,  or  voting 
trusts,  that  they  have  in  respect  of  the  companies  whose  shares 
they  hold,  and  that  the  shareholders  of  holding  companies  have  the 
same  right  as  regards  the  books,  records,  and  accounts  of  the  sub- 
sidiary companies.  The  accounts  of  companies  not  merged  should 
be  separately  kept  and  separately  stated  to  their  individual  stock- 
holders, however  few  they  may  be. 

We  may  point  out  the  fact  that  the  powers  which  holding  com- 


430  THE  STOCK  EXCHANGE  FROM  WITHIN 

panics  now  exercise  were  never  contemplated,  or  imagined,  when 
joint  stock  corporations  were  first  legalized.  If  Parliament  and 
Legislatures  had  foreseen  their  growth  they  would  have  erected 
barriers  against  it. 

RECEIVERSHIPS 

Our  attention  has  been  directed  to  the  well-known  abuses  fre- 
quently accompanying  receiverships  of  large  corporations,  and  more 
especially  public  service  corporations,  and  the  issue  of  receivers' 
certificates.  We  feel  that  the  numerous  cases  of  long-drawn-out 
receiverships,  in  some  instances  lasting  more  than  ten  years,  and 
of  the  issue  of  large  amounts  of  receivers'  certificates,  which  take 
precedence  over  even  first  mortgage  bonds,  are  deserving  of  most 
serious  consideration. 

Legislation  providing  for  a  short-time  limitation  on  receiverships 
or  for  a  hmitation  of  receivers'  certificates  to  a  small  percentage  of 
the  mortgage  liens  on  the  property,  could  be  rendered  unnecessary, 
however,  by  the  action  of  the  courts  themselves  along  these  hues, 
so  as  to  make  impossible  in  the  future  the  abuses  which  have  been 
so  common  in  the  past. 


EFFECT  OF   THE   MONEY  M.\IIKET   ON   SPECULATION 

It  has  been  urged  that  j'our  committee  consider  the  influence  of 
the  money  market  upon  security  speculation. 

As  a  result  of  conditions  to  which  the  defects  of  our  monetary  and 
banking  systems  chiefly  contribute,  there  is  frequently  a  congestion 
of  funds  in  New  York  City,  when  the  supply  is  in  excess  of  business 
needs  and  the  accumulated  surplus  from  the  entire  country  generally 
is  thereby  set  free  for  use  in  the  speculative  market.  Thus  there 
almost  annually  occurs  an  inordinately  low  rate  for  "call  loans," 
at  times  less  than  i  per  cent.  During  the  prevalence  of  this 
abnormally  low  rate  speculation  is  unduly  incited,  and  speculative 
loans  are  very  largely  expanded. 

On  the  other  hand,  occasional  extraordinary  industrial  activity, 
coupled  with  the  annually  recurring  demands  for  money  during  the 
crop-moving  season,  causes  money  stringency,  and  the  calling  of 
loans  made  to  the  stock  market;  an  abnormally  high  interest  rate 
results,  attended  by  violent  reaction  in  speculation  and  abrupt  fall 
in  prices.  The  pressure  to  retain  funds  in  the  speculative  field  at 
these  excessively  high  interest  rates  tends  to  a  curtailment  of  reason- 
able accommodation  to  commercial  and  manufacturing  interests, 
frequently  causing  embarrassment  and  at  times  menacing  a  crisis. 

The  economic  questions  involved  in  these  conditions  are  the  sub- 
ject of  present  consideration  by  the  Federal  authorities  and  the 
National  Monetary  Commission.  They  could  not  be  adjusted  or 
adequately  controlled  either  through  Exchange  regulation  or  State 
legislation. 


APPENDIX  431 

THE   USURY  LAW 

The  usury  law  of  this  State  prohibits  the  taking  of  more  than  6 
per  cent,  interest  for  the  loan  of  money,  hut  by  an  amendment  adopted 
in  18S2  an  exception  is  made  in  the  case  of  loans  of  $5000,  or  more, 
payable  on  demand  and  secured  by  collateral.  It  is  claimed  by  some 
that,  since  this  exception  enables  stock  speculators,  in  times  of  great 
stringency,  to  borrow  money  by  paying  excessively  high  rates  of 
interest,  to  the  exclusion  of  other  borrowers,  a  repeal  of  this  jsrovision 
would  check  inordinate  speculation.  We  direct  attention,  however, 
to  the  fact  that  the  statute  in  question  excepts  such  loans  as  are 
secured  by  warehouse  receipts,  bills  of  lading,  bills  of  exchange,  and 
other  negotiable  instruments.  Hence  its  operation  is  not  limited 
to  Stock  Exchange  transactions,  or  to  speculative  loans  in  general. 
Moreover,  the  repeal  of  the  statute  would  affect  only  the  conditions 
when  high  rates  of  interest  are  exacted,  and  not  those  of  abnormally 
low  rates,  which  really  promote  excessive  speculation.  P^inally,  our 
examination  indicates  that  prior  to  the  enactment  of  the  statute 
of  1882  such  loans  were  negotiated  at  the  maximum  (6  per  cent.), 
plus  a  commission,  which  made  it  equivalent  to  the  higher  rate; 
and  a  repeal  of  the  statute  would  lead  to  the  resumption  of  this 
practice.  Therefore,  as  the  repeal  would  not  be  beneficial,  we  cannot 
recommend  any  legislation  bearing  upon  the  interest  laws  of  the  State, 
unless  it  be  the  repeal  of  the  usury  law  altogether,  as  we  believe  that 
money  will  inevitably  seek  the  point  of  highest  return  for  its  use.  In 
nine  States  of  the  Union  there  are  at  present  no  usury  laws. 

THE  CURB  MARKET 

There  is  an  unorganized  stock  market  held  in  the  open  air  diu-ing- 
exchange  hours.  It  occupies  a  section  of  Broad  Street.  An  en- 
closure in  the  centre  of  the  roadway  is  made  by  means  of  a  rope, 
within  which  the  traders  are  supposed  to  confine  themselves,  leaving 
space  on  either  side  for  the  passage  of  street  traffic;  but  during  days 
of  active  trading  the  crowd  often  extends  from  curb  to  curb. 

There  are  about  200  subscribers,  of  whom  probably  150  appear  on 
the  curb  each  day,  and  the  machinery  of  the  operations  requires  the 
presence  of  as  many  messenger  boys  and  clerks.  Such  obstruction 
of  a  public  thoroughfare  is  obviously  illegal,  but  no  attempt  has  been 
made  by  the  city  authorities  to  disperse  the  crowd  that  habitually 
assembles  there. 

This  open-air  market,  we  understand,  is  dependent  for  the  great 
bulk  of  its  business  upon  members  of  the  Stock  Exchange,  approxi- 
mately 85  per  cent,  of  the  orders  executed  on  the  curb  coming  from 
Stock  Exchange  houses.  The  Exchange  itself  keeps  the  curb  market 
in  the  street,  since  it  forbids  its  own  members  engaging  in  any  trans- 
action in  any  other  security  exchange  in  New  York.  If  the  curb 
were  put  under  a  roof  and  organized,  this  trading  could  not  be 
maintained. 


432  THE  STOCK  EXCHANGE  FROM  WITHIN 

ITS   UTILITY 

The  curb  market  has  existed  for  upward  of  thirty  years,  but  only 
since  the  great  development  of  trading  in  securities  began,  about  the 
year  1897,  has  it  become  really  important.  It  aiiords  a  public  mar- 
ket-place where  all  persons  can  buy  and  sell  securities  which  are  not 
listed  on  an}^  organized  exchange.  Such  rules  and  regulations  as 
exist  are  agreed  to  by  common  consent,  and  the  expenses  of  main- 
tenance are  paid  by  voluntary  subscription.  An  agency  has  been 
established  by  common  consent  through  which  the  rules  and  regula- 
tions are  prescribed. 

This  agency  consists  solely  of  an  individual  who,  through  his  long 
association  with  the  curb,  is  tacitly  accepted  as  arbiter.  From  this 
source  we  learn  that  sales  recorded  during  the  year  1908  were 
roughly  as  follows: 

Bonds $66,000,000 

Stocks,  industrials,  shares 4,770,000 

Stocks,  mining,  shares 41,825,000 

Oflicial  quotations  are  issued  daily  by  the  agency  and  appear 
in  the  public  press.  Corporations  desiring  their  securities  to  be 
thus  quoted  are  required  to  afford  the  agency  certain  information, 
which  is,  however,  superficial  and  incomplete.  There  is  nothing 
on  the  curb  which  corresponds  to  the  listing  process  of  the  Stock 
Exchange.  The  latter,  while  not  guaranteeing  the  soundness  of  the 
securities,  gives  a  prima  facie  character  to  those  on  the  list,  since 
the  stock  list  committee  takes  some  pains  to  learn  the  truth.  The 
decision  of  the  agent  of  the  curb  are  based  on  insufi&cient  data,  and 
since  much  of  the  work  relates  to  mining  schemes  in  distant  States 
and  Territories,  and  foreign  countries,  the  mere  fact  that  a  security 
is  quoted  on  the  curb  should  create  no  presumption  in  its  favor; 
quotations  frequently  represent  "wash  sales,"  thus  facihtating 
swindling  enterprises. 

EVILS   OF   UNORGANIZED   STATUS 

Bitter  complaints  have  reached  us  of  frauds  perpetrated  upon 
confiding  persons,  who  have  been  induced  to  purchase  mining 
shares  because  they  are  quoted  on  the  curb;  these  are  frequently 
advertised  in  newspapers  and  circulars  sent  through  the  mails  as 
so  quoted.  Some  of  these  swindles  have  been  traced  to  their  fountain 
heads  by  the  Post  Office  Department,  to  which  complaint  has  been 
made;  but  usually  the  swindler,  when  cornered,  has  settled  privately 
with  the  individual  complainant,  and  then  the  prosecution  has  failed 
for  want  of  testimony.  Meanwhile  the  same  operations  may  con- 
tinue in  many  other  places,  till  the  swindle  becomes  too  notorious 
to  be  profitable. 


APPENDIX  433 

Notwithstanding  the  lack  of  proper  supervision  and  control  over 
the  admission  of  securities  to  the  privilege  of  quotation,  some  of 
them  are  meritorious,  and  in  this  particular  the  curb  performs  a 
useful  function.  The  existence  of  the  cited  abuses  does  not,  in 
our  judgment,  demand  the  aboHtion  of  the  curb  market.  Regula- 
tion is,  however,  imperative.  To  require  an  elaborate  organization 
similar  to  that  e.xisting  in  the  Exchanges -would  result  in  the  forma- 
tion of  another  curb  free  from  such  restraint. 

As  has  been  stated,  about  85  per  cent,  of  the  business  of  the  curb 
comes  through  the  offices  of  members  of  the  New  York  Stock 
Exchange,  but  a  provision  of  the  constitution  of  that  E.xchange 
prohibits  its  members  from  becoming  members  of,  or  dealing, 
on,  any  other  organized  Stock  Exchange  in  New  York,  Accord- 
ingly, operators  on  the  curb  market  have  not  attempted  to  form 
an  organization.  The  attitude  of  the  Stock  Exchange  is  there- 
fore largely  responsible  for  the  existence  of  such  abuses  as  result 
from  the  want  of  organization  of  the  curb  market.  The  brokers 
dealing  on  the  latter  do  not  wish  to  lose  their  best  customers, 
and  hence  they  submit  to  these  irregularities  and  inconven- 
iences. 

Some  of  the  members  of  the  Exchange  dealing  on.  the  curb  have 
apparently  been  satisfied  with  the  prevailing  conditions,  and  in  their 
own  selfish  interests  have  maintained  an  attitude  of  indifference 
toward  abuses.  We  are  informed  that  some  of  the  most  flagrant 
cases  of  discreditable  enterprises  finding  dealings  on  the  curb  were 
promoted  by  members  of  the  New  York  Stock  Exchange. 

EEFORMATON   OF   THE   CURB 

The  present  apparent  attitude  of  the  Exchange  toward  the  curb 
seems  to  us  clearly  inconsistent  with  its  moral  obhgations  to  the 
community  at  large.  Its  governors  have  frequently  avowed  before 
this  committee  a  purpose  to.  co-operate  to  the  greatest  extent  for 
the  remedy  of  any  evils  found  to  exist  in  stock  speculation.  The 
curb  market  as  at  present  constituted  affords  ample  opportunity 
for  the  exercise  of  such  helpfulness. 

The  Stock  Exchange  should  compel  the  formulation  and  enforce- 
ment of  such  rules  as  may  seem  proper  for  the  regulation  of  business 
on  the  curb,  the  conduct  of  those  dealing  thereon,  and,  particularly, 
for  the  admission  of  securities  to  quotation. 

If  the  curb  brokers  were  notified  that  failure  to  comply  with  such 
requirements  would  be  followed  by  an  application  of  the  rule  of 
non-intercourse,  there  is  little  doubt  that  the  orders  of  the  Exchange 
would  be  obeyed.  The  existing  connection  of  the  Exchange  gives 
it  ample  power  to  accomplish  this,  and  we  do  not  suggest  anything 
implying  a  more  intimate  connection. 

Under  such  regulation,  the  curb  market  might  be  decently  housed 
to  the  relief  of  its  members  and  the  general  pubhc. 


434  THE  STOCK  EXCHANGE  FROM  WITHIN 

THE   ABUSE   OF   ADVERTISING 

A  large  part  of  the  discredit  in  the  pubhc  mind  attaching  to 
"Wall  Street"  is  due  to  frauds  perpetrated  on  the  small  investor 
throughout  the  country  in  the  sale  of  worthless  securities  by  means 
of  alluring  circulars  and  advertisements  in  the  newspapers.  To 
the  success  of  such  swindling  enterprises  a  portion  of  the  press  con- 
tributes. 

Papers  which  honestly  try  to  distinguish  between  swindling  adver- 
tisements and  others  may  not  in  every  instance  succeed  in  doing 
so;  but  reachness  to  accept  advertisements  which  are  obviously 
traps  for  the  unwary  is  evidence  of  a  moral  delinquency  which  should 
draw  out  the  severest  public  condemnation. 

So  far  as  the  press  in  the  large  cities  is  concerned  the  correction 
of  the  evil  lies,  in  some  measure,  in  the  hands  of  the  reputable 
bankers  and  brokers;  who,  by  refusing  their  advertising  patronage 
to  newspapers  notoriously  guilty  in  this  respect,  could  compel  them 
to  mend  their  ways,  and  at  the  same  time  prevent  fraudulent 
schemes  from  deriving  an  appearance  of  merit  by  association  with 
reputable  names. 

Another  serious  evil  is  committed  by  men  who  give  standing  to 
promotions  by  serving  as  directors  without  full  knowledge  of  the 
affairs  of  the  companies,  and  by  allowing  their  names  to  appear 
in  prospectuses  without  knowing  the  accuracy  and  good  faith  of 
the  statements  contained  therein.  Investors  naturally  and  properly 
pay  great  regard  to  the  element  of  personal  character,  both  in  the 
offering  of  securities  and  in  the  management  of  corporations,  and 
can  therefore  be  deceived  by  the  names  used  in  unsound  promotions. 

BiaTISH   SYSTEM   CONSIDERED 

We  have  given  much  attention  to  proposals  for  compelling  regis- 
tration, by  a  bureau  of  the  State  government,  of  all  corporations 
whose  securities  are  offered  for  public  sale  in  this  State,  accompanied 
by  information  regarding  their  financial  responsibihty  and  prospects, 
and  prohibiting  the  public  advertisements  or  sale  of  such  securities 
without  a  certificate  from  the  bureau  that  the  issuing  company  has 
been  so  registered.  The  object  of  such  registration  would  be  to 
identify  the  promoters,  so  that  they  might  be  readily  prosecuted 
in  case  of  fraud.  Such  a  system  exists  in  Great  Britain.  The 
British  "Companies  Act"  provides  for  such  registration,  and  the 
"Directors'  Liability  Act"  regulates  the  other  evil  referred  to  above. 
Some  members  of  your  committee  are  of  the  opinion  that  these 
laws  should  be  adopted  in  this  country,  so  far  as  they  will  fit  con- 
ditions here. 

This  would  meet  with  some  difficulties,  due  in  part  to  our  multiple 
system  of  State  government.  If  the  law  were  in  force  only  in  this 
State,  the  advertisement  and  sale  of  the  securities  in  question  would 
be  unhindered  in  other  markets,  and  companies  would  be  incorporated 


APPENDIX  435 

in  other  States,  in  order  that  their  directors  and  promoters  should 
escape  liability.  The  certificate  of  registration  might  be  accepted 
by  inexperienced  persons  as  an  approval  by  State  authority  of  the 
enterprise  in  (question.  P"or  these  reasons  the  majority  of  your 
committee  does  not  recommend  the  regulation  of  such  advertising 
and  sale  by  State  registration. 

In  so  far  as  the  misuse  of  the  post-office  for  the  distribution  of 
swindling  circulars  could  be  regulated  b}'  the  Federal  authorities 
the  officials  have  been  active  in  checking  it.  They  inform  us  that 
vendors  of  worthless  securities  are  aided  materially  by  the  oppor- 
tunity to  obtain  fictitious  price  quotations  for  them  on  the  New 
York  Curb  market. 

LEGISLATION   RECOMMENDED 

For  the  regulation  of  the  advertising  evils,  including  the  vicious 
"tipster's"  cards,  we  recommend  an  amendment  to  the  Penal  Code 
to  provide  that  any  person  who  advertises,  in  the  public  press,  or 
otherwise,  or  publishes,  distributes  or  mails,  any  prospectus,  circular, 
or  other  statement  in  regard  to  the  value  of  any  stock,  bonds,  or 
other  securities,  or  in  regard  to  the  business  affairs,  property,  or 
financial  condition  of  any  corporation,  joint  stock  association, 
copartnership  or  individual  issuing  stock,  bonds,  or  other  similar 
securities,  which  contains  any  statement  of  fact  which  is  known  to 
such  person  to  be  false,  or  as  to  which  such  person  has  no  reasonable 
grounds  for  believing  it  to  be  true,  or  any  promises  or  predictions 
which  he  cannot  reasonably  justify,  shall  be  guilty  of  a  misdemeanor; 
and,  further,  that  every  newspaper  or  other  publication  printing 
or  publishing  such  an  advertisement,  prospectus,  circular,  or  other 
statement,  shall,  before  printing  or  publishing  the  same,  obtain 
from  the  person  responsible  for  the  same,  and  retain,  a  written 
and  signed  statement  to  the  effect  that  such  person  accepts  responsi- 
bility for  the  same,  and  for  the  statements  of  fact  contained  therein, 
which  statement  shall  give  the  address,  with  street  number,  of  such 
person;  and  that  the  publisher  of  any  such  newspaper  or  other 
publication  which  shall  fail  to  obtain  and  retain  such  statement 
shall  be  guilty  of  a  misdemeanor. 

BUCKET-SHOPS 

Bucket-shops  are  ostensibly  brokerage  offices,  where,  however, 
conunodities  and  securities  are  neither  bought  nor  sold  in  pursuance 
of  customers'  orders,  the  transactions  being  closed  by  the  payment 
of  gains  or  losses,  as  determined  by  price  quotations.  In  other 
words,  they  are  merely  places  for  the  registration  of  bets  or  wagers; 
their  machinery  is  generally  controlled  by  the  keepers,  who  can 
delay  or  manipulate  the  quotations  at  will. 

The  law  of  this  State,  which  took  effect  September  i,  igo8,  makes 
the  keeping  of  a  bucket-shop  a  felony,  punishable  by  fine  and  im- 


436  THE  STOCK  EXCHANGE  FROM  WITHIN 

prisonment,  and  in  the  case  of  corporations,  on  second  offences  by 
dissolution  or  expulsion  from  the  State.  In  the  case  of  individuals 
the  penalty  for  a  second  offence  is  the  same  as  for  the  first.  These 
penalties  are  imposed  upon  the  theory  that  the  practice  is  gambling; 
but  in  order  to  establish  the  fact  of  gambling  it  is  necessary,  under 
the  New  York  law,  to  show  that  both  parties  to  the  trade  intended 
that  it  should  be  settled  by  the  payment  of  differences,  and  not  by 
delivery  of  property.  Under  the  law  of  Massachusetts  it  is  neces- 
sary to  show  only  that  the  bucket-shop  keeper  so  intended.  The 
Massachusetts  law  provides  heavier  penalties  for  the  second  offence 
than  for  the  first,  and  makes  it  a  second  offence  if  a  bucket-shop  is 
kept  open  after  the  first  conviction. 

AMENDMENT   OF   LAW    RECOMMENDED 

We  recommend  that  the  foregoing  features  of  the  Massachusetts 
law  be  adopted  m  this  State;  also  that  section  355  of  the  act  of  1908 
be  amended  so  as  to  require  brokers  to  furnish  to  their  customers  iti 
all  cases,  and  not  merely  on  demand,  the  names  of  brokers  from  whom 
shares  were  bought  and  to  whom  they  were  sold,  and  that  the  fol- 
lowing section  be  added  to  the  act: 

Witness's  privilege: 

No  person  shall  be  excused  from  attending  and  testifJ^ng,  or 
producing  any  books,  papers,  or  other  documents  before  any  court 
or  magistrate,  upon  any  trial,  investigation,  or  proceeding  initiated 
by  the  district  attorney  for  a  violation  of  any  of  the  provisions  of 
this  chapter,  upon  the  ground  or  for  the  reason  that  the  testimony 
or  evidence,  documentary  or  otherwise,  required  or  him  may  tend 
to  convict  him  of  a  crime  or  to  subject  him  to  a  penalty  or  forfeiture; 
but  no  person  shall  be  prosecuted  or  subjected  to  any  penalty  or 
forfeiture  for  or  on  account  of  any  transaction,  matter,  or  thing 
concerning  which  he  may  so  testify  or  produce  evidence,  documentary 
or  otherwise,  and  no  testimony  so  given  or  produced  shall  be  received 
against  him  upon  any  criminal  investigation  or  proceeding. 

There  has  been  a  sensible  diminution  in  the  number  of  bucket- 
shops  in  New  York  since  the  act  of  1908  took  effect,  but  there  is 
still  much  room  for  improvement. 

Continuous  quotations  of  prices  from  an  exchange  are  indis- 
pensable to  a  bucket-shop,  and  when  such  quotations  are  cut  off 
this  gambling  ends;  therefore  every  means  should  be  employed  to 
cut  them  off. 

SALES   OF   QUOTATIONS 

The  quotations  of  exchanges  have  been  judicially  determined 
to  be  their  own  property,  which  may  be  sold  under  contracts  limiting 
their  use.  In  addition  to  supplying  its  own  members  in  New  York 
City  with  its  quotations,  the  Stock  Exchange  sells  them  to  the 


APPENDIX  437 

telegraph  companies,  under  contracts  restricting  the  delivery  of  the 
service  in  New  York  Citj'  to  subscribers  approved  by  a  committee 
of  the  Exchange;  the  cc^jitracts  are  terminable  at  its  option.  This 
restriction  would  imply  a  purpose  on  the  part  of  the  Exchange  to 
prevent  the  use  of  the  quotations  by  bucket-shop  keepers.  But 
the  contracts  are  manifestly  insuflicient,  in  that  they  fail  to  cover 
the  use  of  the  service  in  places  other  than  New  York  City;  if  corrobo- 
ration were  needed  it  could  be  found  in  the  fact  that  the  quotations 
are  the  basis  for  bucket-shop  transactions  in  other  cities.  In  such 
effort  as  has  been  made  to  control  these  quotations  the  Exchange 
has  been  hampered  to  some  extent  by  the  claim  that  telegraph  com- 
panies are  common  carriers,  and  that  as  such  they  must  render 
equal  service  to  all  persons  offering  to  pay  the  regular  charge  therefor. 
This  claim  has  been  made  in  other  States  as  well  as  in  New  York, 
and  the  telegraph  companies  have  in  the  past  invoked  it  as  an  excuse 
for  furnishing  quotations  to  people  who  were  under  suspicion, 
although  it  was  not  possible  to  prove  that  they  were  operating 
bucket-shops.  Recent  decisions  seem  to  hold  that  this  claim  is  not 
well-founded.  We  advise  that  a  law  be  passed  providing  that,  so  far 
as  the  transmission  of  continuous  quotations  is  concerned,  telegraph 
companies  shall  not  be  deemed  common  carriers,  or  be  compelled 
against  their  volition  to  transmit  such  quotations  to  any  person; 
also  a  law  providing  that  if  a  telegraph  company  has  reasonable 
ground  for  believing  that  it  is  supplying  quotations  to  a  bucket- 
shop,  it  be  criminally  liable  equally  with  the  keeper  of  the  bucket- 
shop.  Such  laws  would  enable  these  companies  to  refuse  to  furnish 
quotations  upon  mere  suspicion  that  parties  are  seeking  them  for 
an  unlawful  business,  and  would  compel  them  to  refuse  such  service 
wherever  there  was  a  reasonable  ground  for  believing  that  a  bucket- 
shop  was  being  conducted. 

LICENSING   TICKERS 

Tickers  carrj^ing  the  quotations  should  be  licensed  and  bear  a 
plate  whereon  should  appear  the  name  of  the  corporation,  firm,  or 
individual  furnishing  the  service  or  installing  the  ticker,  and  a 
license  number.  Telegraph  companies  buying  or  transmitting 
quotations  from  the  exchanges  should  be  required  to  publish  semi- 
annually the  names  of  all  subscribers  to  the  service  furnished,  and 
the  number  and  location  of  the  tickers,  in  a  newspaper  of  general 
circulation  published  in  the  city  or  town  in  which  such  tickers 
are  installed.  In  case  the  service  is  furnished  to  a  corporation,  firm, 
or  person,  in  turn  supplying  the  quotations  to  others,  like  particulars 
should  be  published.  A  record,  open  to  public  inspection,  should 
be  kept  by  the  installing  company  showing  the  numbers  and  location 
of  the  tickers.  Doubtless  local  boards  of  trade,  civic  societies,  and 
private  individuals  would,  if  such  information  were  within  their 
reach,  lend  their  aid  to  the  authorities  in  the  enforcement  of  the  law. 

Measures  should  be  taken  also  to  control  the  direct  wire  service 


438  THE  STOCK  EXCHANGE  FROM  WITHIN 

for  the  transmission  of  quotations,  and  for  the  prompt  discontinuance 
of  such  service  in  case  of  improper  use  thereof.  In  short,  every 
possible  means  should  be  employed  to  prevent  bucket-shops  from 
obtaining  the  continuous  quotations,  without  which  their  depreda- 
tions could  not  be  carried  on  a  single  day. 

THE  COMMODITY  EXCHANGES 

Of  the  seven  commodity  exchanges  in  the  city  of  New  York, 
three  dealing  with  Produce,  Cotton,  and  Coffee,  are  classed  as  of 
major  importance;  two  organized  by  dealers  in  Fruit  and  Hay,  are 
classed  as  minor;  and  two  others,  the  Mercantile  (concerned  with 
dairy  and  poultry  products)  and  the  Metal  (concerned  with  mining 
products)  are  somewhat  difficult  of  classification,  as  will  appear 
hereafter. 

THE  MAJOR  EXCHANGES 

The  business  transacted  on  the  three  major  exchanges  is  mainly 
speculative,  consisting  of  purchases  and  sales  for  future  delivery 
either  by  those  who  wish  to  eliminate  risks  or  by  those  who  seek 
to  profit  by  fluctuations  in  the  value  of  products.  "Cash"  or 
"spot"  transactions  are  insignificant  in  volume. 

The  objects,  as  set  forth  in  the  charters,  are  to  provide  places  for 
trading,  establish  equitable  trade  principles  and  usages,  obtain  and 
disseminate  useful  information,  adjust  controversies,  and  fix  by-laws 
and  rules  for  these  purposes. 

Trading  in  differences  of  price  and  "wash  sales"  are  strictly  pro- 
hibited under  penalty  of  expulsion.  All  contracts  of  sale  call  for 
delivery,  and  unless  balanced  and  canceled  by  equivalent  contracts 
of  purchase,  must  be  finally  settled  by  a  delivery  of  the  merchandise 
against  cash  payment  of  its  value  as  specified  in  the  terms  of  the 
contract;  but  the  actual  delivery  may  be  waived  by  the  consent  of 
both  parties.  Possession  is  for  the  most  part  transferred  from  the 
seller  to  the  purchaser  by  warehouse  receipts  entitling  the  holder 
to  the  ownership  of  the  goods  described. 

DEALING   IN   "FUTURES" 

The  selling  of  agricultural  products  for  future  delivery  has  been 
the  subject  of  much  controversy  in  recent  years.  A  measure  to 
prohibit  such  selling,  known  as  the  Hatch  Anti-Option  bill,  was 
debated  at  great  length  in  Congress  during  the  years  1892,  1893,  and 
1894.  Although  it  passed  both  House  and  Senate  in  different 
forms,  it  was  finall}'  abandoned  by  common  consent.  As  shown 
hereafter,  similar  legislation  in  Germany  has  proved  injurious;  and 
when  attempted  by  our  States  it  has  either  resulted  detrimentally 
or  been  inoperative.  The  subject  was  exhaustively  considered  by 
the  Industrial  Commission  of  Congress  which  in  1901  made  an 
elaborate  report  (Vol.  VI),  showing  that  selling  for  future  delivery, 


APPENDIX  439 

based  upon  a  forecast  of  future  conditions  of  supply  and  demand, 
is  an  indispensable  part  of  the  world's  commercial  future  delivery 
has  been  the  subject  of  machinery,  by  which  prices  are,  as  far  as 
possible,  equalized  throughout  the  year  to  the  advantage  of  both 
producer  and  consumer.  The  subject  is  also  treated  with  clearness 
and  impartiality  in  the  Cyclopedia  of  American  Agriculture,  in  an 
article  on  "Speculation  and  Farm  Prices";  where  it  is  shown  that 
since,  the  yearly  supply  of  wheat,  for  example,  matures  within  a  com- 
paratively short  period  of  time  somebody  must  handle  and  store  the 
great  bulk  of  it  during  the  interval  between  production  and  con- 
sumption. Otherwise  the  price  will  be  unduly  depressed  at  the 
end  of  one  harvest  and  correspondingly  advanced  before  the  begin- 
ning of  another. 

Buying  for  future  delivery  causes  advances  in  prices;  selling  short 
tends  to  restrain  inordinate  advances.  In  each  case  there  must  be 
a  buj'er  and  a  seller  and  the  interaction  of  their  trading  steadies 
prices.  Speculation  thus  brings  into  the  market  a  distinct  class 
of  people  possessing  capital  and  special  training  who  assume  the 
risks  of  holding  and  distributing  the  proceeds  of  the  crops  from  one 
season  to  another  with  the  minimum  of  cost  to  producer  and  con- 
sumer. 


A  considerable  part  of  the  business  done  by  these  exchanges 
consists  of  "hedging."  This  term  is  applied  to  the  act  of  a  miller, 
for  example,  who  is  under  contract  to  supply  a  given  quantity  of 
flour  monthly  throughout  the  year.  In  order  to  insure  himself 
against  loss  he  makes  a  contract  with  anybody  whom  he  considers 
financially  responsible,  to  supply  him  wheat  at  times  and  in  the 
quantities  needed.  He  "hedges"  against  a  possible  scarcity  and 
consequent  rise  in  the  price  of  wheat.  If  the  miller  were  restricted 
in  his  purchases  to  persons  in  the  actual  possession  of  wheat  at 
the  time  of  making  the  contract  he  would  be  exposed  to  monopoly 
prices.  If  the  wheat  producer  were  limited  in  his  possibilities  of  sale 
to  consumers  only,  he  would  be  subjected  to  the  depressing  effects 
of  a  glut  in  the  market  in  June  and  September,  at  times  of  harvest. 

To  the  trader,  manufacturer,  or  exporter,  the  act  of  transferring 
the  risk  of  price  fluctuations  to  other  persons  who  are  willing  to 
assume  it,  has  the  effect  of  an  insurance.  It  enables  him  to  use 
all  of  his  time  and  capital  in  the  management  of  his  own  business 
instead  of  devoting  some  part  of  them  to  contingencies  arising  from 
unforeseen  crop  conditions. 

ALTERNATIVE   CONTRACTS 

In  order  to  ehminate  the  risk  of  a  shortage  of  specific  grades  of 
the  merchandise  thus  traded  in,  contracts  generally  permit  the  deliv- 
ery of  alternative  grades,  within  certain  limits,  at  differential  prices; 
and  if  the  grade  to  be  delivered  be  not  suitable  for  the  ultimate 


440  THE  STOCK  EXCHANGE  FROM  WITHIN 

needs  of  the  purchaser,  it  can  under  ordinary  circumstances  be 
exchanged  for  the  grade  needed,  by  the  payment  of  the  differential. 
It  is  true  that  in  this  exchange  of  grades  there  is  sometimes  a  loss  or 
a  profit,  owing  to  some  unexpected  diminution  or  excess  of  supply 
of  the  particular  grade  wanted,  due  to  the  weather  or  other  natural 
causes. 

Deposits  of  cash  margins  may  be  required  mutually  bj'  members 
at  the  time  of  making  contracts,  and  subsequent  additional  ones  if 
market  fluctuations  justify. 

Dealings  for  outsiders  are  usually  upon  a  lo  per  cent,  margin; 
obviously,  if  this  margin  were  increased  generally,  say  to  20  per  cent., 
a  considerable  part  of  the  criticism  due  to  losses  in  speculation, 
particularly  as  to  the  Cotton  Exchange,  would  be  eliminated. 

The  major  part  of  the  transactions  are  adjusted  by  clearing 
systems,  the  method  most  prevalent  being  "ring  settlements," 
by  which  groups  of  members  having  buying  and  selling  contracts 
for  identical  quantities,  offset  them  against  each  other,  canceling 
them  upon  the  payment  of  the  differences  in  prices. 

THE  PRODUCE  EXCHANGE 

The  New  York  Produce  Exchange  was  chartered  by  the  Legis- 
lature in  18&2,  under  the  style  of  the  "New  York  Commercial 
Association."  The  charter  has  been  amended  several  times;  in 
1907  dealing  in  securities,  as  well  as  in  produce,  was  authorized. 
There  are  over  2000  members,  but  a  larger  number  are  inactive. 
Some  members  are  also  connected  with  the  Stock  and  Cotton  E.x- 
changes.  The  business  includes  dealing  in  all  grains,  cottonseed  oil, 
and  a  dozen  or  more  other  products;  wheat  is,  however,  the  chief 
subject  of  trading,  and  part  thereof  consists  of  hedging  by  and  for 
millers,  exporters,  and  importers,  both  here  and  abroad.  The 
quantity  of  wheat  received  in  New  York  in  the  five  years  1904-1908 
averaged  21,000,000  bushels  annually.  No  record  of  "cash"  sales 
is  kept.  The  reported  sales  of  "futures"  show  in  five  years  an 
annual  average  of  480,000,000  bushels,  the  year  1907  showing 
610,000,000.  Although  some  of  these  sales  were  virtually  bets 
©n  price  differences,  aU  of  them  were  contracts  enforcible  at  law. 

CLEARING   SYSTEM 

The  greater  part  of  the  transactions  are  settled  by  a  clearing 
system.  The  Clearing  Association  is  a  separate  organization,  duly 
incorporated,  with  a  capital  of  $25,000.  AU  members  of  the  asso- 
ciation must  settle  daily  by  the  clearing  system;  other  members  of 
the  Exchange  ma}'  do  so.  The  Clearing  Association  assumes 
responsibility  for  the  trades  of  all  its  members,  and  accordingly 
controls  the  exaction  of  margins  from  members  to  each  other,  and 
may  increase  them  at  any  time  if  the  fluctuations  require  it.  The 
records  of  the  clearings  show  day  by  day  the  status  of  each  member's 


APPENDIX  441 

trading  —  how  much  he  may  be  "long"  or  "short"  in  the  aggre- 
gate. Thus  the  members  have  a  system  of  protection  against  each 
other;  the  welfare  of  all  depends  upon  keeping  the  commitments  of 
each  within  safe  hmits.  The  official  margin  system  operates  as  a 
commendable  restraint  upon  over-speculation. 

From  our  examination  of  the  trading  in  mining  stocks  recently 
introduced,  we  conclude  that  the  lack  of  experience  of  this  body 
in  this  class  of  business  has  resulted  in  a  neglect  of  proper  safeguards 
to  the  investor  and  an  undue  incitement  to  speculative  transactions 
of  a  gambhng  nature,  and  should  not  be  tolerated  on  the  Produce 
Exchange. 

THE  COTTON  EXCHANGE 

The  New  York  Cotton  Exchange  was  incorporated  by  a  special 
charter  in  1871.  Its  membership  is  limited  to  450.  It  is  now  the 
most  important  cotton  market  in  the  world,  as  it  provides  the  means 
for  financing  about  80  per  cent,  of  the  crop  of  the  United  States, 
and  is  the  intermediary  for  facilitating  its  distribution.  In  fact, 
it  is  the  world's  clearing  house  for  the  staple.  Traders  and  manu- 
facturers in  Japan,  India,  Egypt,  Great  Britain,  Germany,  France, 
and  Spain,  as  well  as  the  United  States,  buy  and  sell  here  daily 
and  the  business  is  still  increasing. 

Cotton  is  the  basis  of  the  largest  textile  industry  in  the  world. 
The  business  is  conducted  on  a  gigantic  scale  in  many  countries 
by  means  of  vast  capital,  complicated  machinery,  and  varied 
processes  involving  considerable  periods  of  time  between  the  raw 
material  and  the  finished  product.  Selling  for  future  delivery  is 
necessary  to  the  harmonious  and  uninterrupted  movement  of  the 
staple  from  producer  to  consumer.  Nearly  all  the  trading,  beginning 
with  that  of  the  planter,  involves  short  selling.  The  planter  sells 
to  the  dealer,  the  dealer  to  the  spinner,  the  spinner  to  the  weaver, 
the  weaver  to  the  cloth  merchant,  before  the  cotton  of  any  crop  year 
is  picked.  Dealers  who  take  the  risk  of  price  fluctuations  insure 
all  the  other  members  of  this  trading  chain  against  losses  arising 
therefrom  and  spare  them  the  necessity  of  themselves  being  specu- 
lators in  cotton.  The  risks  connected  with  raising  and  marketing 
cotton  must  be  borne  by  some  one,  and  this  is  now  done  chiefly 
by  a  class  who  can  give  their  undivided  attention  to  it. 

GRADING   OF   COTTON 

The  grading  of  cotton  is  the  vital  feature  of  the  trade.  When  no 
grade  is  specified  in  the  contract,  it  is  construed  to  be  middling. 
There  are  now  eighteen  grades,  ranging  from  middling  stained  up 
to  fair.  This  classification  differs  somewhat  from  that  of  other 
markets,  and  last  January  the  Department  of  Agriculture  at  Wash- 
ington took  up  the  subject  of  standardizing  the  various  grades  for 
all  American  markets.     The  New  York  Cotton  Exchange  partici- 


442  THE  STOCK  EXCHANGE  FROM  WITHIN 

pated  in  this  work;  a  standard  was  thus  adopted,  the  types  of  which 
were  supplied  by  its  classification  committee.  It  varies  but  little 
from  the  one  previously  in  use  here.  The  samples  chosen  to  repre- 
sent the  several  types  are  now  sealed,  in  possession  of  the  Depart- 
ment of  Agriculture,  awaiting  the  action  of  Congress. 

The  cotton  plant  is  much  exposed  to  vicissitudes  of  the  weather. 
A  single  storm  may  change  the  grade  of  the  crop  in  large  sections 
of  the  country.  It  becomes  necessary  therefore  to  provide  some 
protection  for  traders  who  have  made  contracts  to  deliver  a  par- 
ticular grade  which  has  Ijecome  scarce  by  an  accident  which  could 
not  be  foreseen.  For  this  purpose  alternative  deliveries  are  allowed 
by  the  payment  of  corresponding  price  differentials,  fLxed  by  a  com- 
mittee of  the  Exchange  twice  annually,  in  the  months  of  September 
and  November. 

Settlements  of  trades  ma}'  be  made  individually,  or  by  groups 
of  members,  or  through  a  clearing  system,  the  agency  of  which  is 
a  designated  bank  near  the  Exchange.  No  record  is  kept  of  the 
transactions,  but  it  is  probable  that  for  a  series  of  years  the  sales 
have  averaged  fully  50,000,000  bales  annually. 

INORDINATE   SPECULATION 

There  have  been  in  the  past  instances  of  excessive  and  unreason- 
able speculation  upon  the  Cotton  Exchange,  notably  the  Sully 
speculation  of  1904.  We  believe  that  there  is  also  a  great  deal  of 
speculation  of  the  gambling  type  mentioned  in  the  introduction  to 
this  report.  In  our  opinion,  the  Cotton  Exchange  should  take  meas- 
ures to  restrain  and  so,  far  as  possible,  prevent  these  practices, 
by  disciplining  members  who  engage  in  them.  The  officers  of  the 
Exchange  must  in  many  cases  be  aware  of  these  practices,  and 
could,  in  our  opinion,  do  much  to  discourage  them. 

THE  COFFEE  EXCHANGE 

The  Coffee  Exchange  was  incorporated  by  special  charter  in 
1885.     It  has  320  members,  about  80  per  cent,  active. 

It  was  established  in  order  to  supply  a  daily  market  where  coffee 
could  be  bought  and  sold  and  to  fix  quotations  therefor,  in  dis- 
tinction from  the  former  method  of  alternate  glut  and  scarcity,  with 
wide  variations  in  price  —  in  short,  to  create  stability  and  certainty 
in  trading  in  an  important  article  of  commerce.  This  it  has  accom- 
plished; and  it  has  made  New  York  the  most  important  primary 
coffee  market  in  the  United  States.  But  there  has  been  recently 
introduced  a  non-commercial  factor  known  as  "valorization,"  a 
governmental  scheme  of  Brazil,  by  which  the  public  treasury  has 
assumed  to  purchase  and  hold  a  certain  percentage  of  the  coffee 
grown  there,  in  order  to  prevent  a  decHne  of  the  price.  This  has 
created  abnormal  conditions  in  the  coffee  trade. 


APPENDIX  443 

All  transactions  must  be  reported  by  the  seller  to  the  superin- 
tendent of  the  Exchange  with  an  exact  statement  of  the  time  and 
terms  of  delivery.  The  record  shows  that  the  average  annual  sales 
in  the  past  five  years  have  been  in  excess  of  16,000,000  bags  of  250 
pounds  each. 

Contracts  may  be  transferred  or  offset  by  voluntary  clearings  by 
groups  of  members.  There  is  no  general  clearing  system.  There 
is  a  commendable  rule  providing  that,  in  case  of  a  "corner,"  the 
officials  may  fix  a  settlement  price  for  contracts  to  avoid  disastrous 
failures. 

THE  OTHER  EXCHANGES 

Of  the  exchanges 'which  we  have  classed  as  minor,  those  dealing 
with  Fruit  and  Hay,  appear  to  be  in  nowise  concerned  with  specula- 
tion. No  sales  whatever  are  conducted  on  them,  all  transactions 
being  consummated  either  in  the  places  of  business  of  the  members 
or  at  public  auction  to  the  highest  bidder.  No  quotations  are 
made  or  published. 

In  the  case  of  the  other  two  commodity  exchanges,  the  Mercantile 
and  the  ISIetal,  new  problems  arise.  Although  quotations  of  the 
products  appertaining  to  these  exchanges  are  printed  daily  in  the 
public  press,  they  are  not  a  record  of  actual  transactions  amongst 
members,  either  for  immediate  or  future  delivery. 

It  is  true  that  on  the  Mercantile  Exchange  there  are  some  desultory 
operations  in  so-called  future  contracts  in  butter  and  eggs,  the 
character  of  which  is,  however,  revealed  by  the  fact  that  neither 
delivery  by  the  seller  nor  acceptance  by  the  buyer  is  obligatory; 
the  contract  may  be  voided  by  either  party  by  payment  of  a  maxi- 
mum penalty  of  5  per  cent.  There  are  nominal  "calls,"  but  trading 
is  confessedly  rare.  The  published  quotations  are  made  by  a  com- 
mittee, the  membership  of  which  is  changed  periodically.  That 
committee  is  actually  a  close  corporation  of  the  buyers  of  butter 
and  eggs,  and  the  prices  really  represent  their  views  as  to  the  rates 
at  which  the  trade  generally  should  be  ready  to  buy  from  the  farmers 
and  country  dealers. 

Similar,  but  equally  deceptive,  is  the  method  of  making  quotations 
on  the  Metal  Exchange.  In  spite  of  the  apparent  activity  of  dealings 
in  this  organization  in  published  market  reports,  there  are  no  actual 
sales  on  the  floor  of  the  Metal  Exchange,  and  we  are  assured  that 
there  have  been  none  for  several  years.  Prices  are,  however, 
manipulated  up  and  down  by  a  quotation  committee  of  three, 
chosen  annually,  who  represent  the  great  metal-selling  agencies  as 
their  interest  may  appear,  affording  facilities  for  fixing  prices  on 
large  contracts,  mainl}'  for  the  profit  of  a  small  clique,  embracing, 
however,  some  of  the  largest  interests  in  the  metal  trade. 

These  practices  result  in  deceiving  buyers  and  sellers.  The  making 
and  pubhshing  of  quotations  for  commodities  or  securities  by  groups 
of  men  calling  themselves  an  exchange,  or  by  any  other  similar 


444  THE  STOCK  EXCHANGE  FROM  WITHIN 

title,  whether  incorporated  or  not,  should  be  prohibited  by  law, 
"where  such  quotations  do  not  fairly  and  truthfully  represent  any 
bona  fide  transactions  on  such  exchanges.  Under  present  conditions, 
we  are  of  the  opinion  that  the  Mercantile  and  Metal  Exchanges 
'do  actual  harm  to  producers  and  consumers,  and  that  their  charters 
should  be  repealed. 

THE  EXPERIENCE  OF  GERMANY 

In  1892  a  commission  was  appointed  by  the  German  Government 
to  investigate  the  methods  of  the  Berlin  Exchange.  The  regular 
business  of  this  exchange  embraced  both  securities  and  commodities; 
it  was  an  open  board  where  anybody  by  paying  a  small  fee  could 
trade  either  for  his  own  account,  or  as  a  broker.  The  broker  could 
make  such  charge  as  he  pleased  for  his  services,  there  being  no 
fixed  rate  of  commission.  Settlements  took  place  monthly.  Margins 
were  not  always  required.  Under  these  circumstances  many  unde- 
sirable elements  gained  entrance  to  the  Exchange  and  some  glaring 
frauds  resulted. 

The  commission  was  composed  of  government  officials,  merchants, 
bankers,  manufacturers,  professors  of  political  economy,  and  journal- 
ists. It  was  in  session  one  year  and  seven  months.  Its  report  was 
completed  in  November,  1893.  Although  there  had  been  a  wide- 
spread popular  demand  that  all  short  selling  should  be  prohibited, 
the  commission  became  satisfied  that  such  a  pohcy  would  be  harmful 
to  German  trade  and  industry,  and  they  so  reported.  They  were 
willing,  however,  to  prohibit  speculation  in  industrial  stocks.  In 
general  the  report  was  conservative  in  tone. 

THE   LAW   OF    1896 

The  Reichstag,  however,  rejected  the  biU  recommended  by  the 
commission  and  in  1896  enacted  a  law  much  more  drastic.  The 
landowners,  constituting  the  powerful  Agrarian  party,  contended 
that  short  selling  lowered  the  price  of  agricultural  products,  and 
demanded  that  contracts  on  the  Exchange  for  the  future  delivery 
of  wheat  and  flour  be  prohibited.  The  Reichstag  assented  to  this 
demand.  It  yielded  also  to  demands  for  an  abatement  of  stock 
speculation,  and  prohibited  trading  on  the  Exchange  in  industrial 
and  mining  shares  for  future  delivery.  It  enacted  also  that  every 
person  desiring  to  carry  on  speculative  transactiorft  be  required  to 
enter  his  name  in  a  public  register,  and  that  speculative  trades  by 
persons  not  so  registered  should  be  deemed  gambling  contracts  and 
void.  The  object  of  the  registry  was  to  deter  the  small  speculators 
from  stock  gambling  and  restrict  speculation  to  men  of  capital  and 
character. 

The  results  were  quite  different  from  the  intention  of  the  legis- 
lators. Verj'  few  persons  registered.  Men  of  capital  and  character 
dechned  to  advertise  themselves  as  speculators.      The  small  fry 


APPENDIX  445 

found  no  difficulty  in  evading  the  law.  Foreign  brokers  seeing  a 
new  field  of  activity  opened  to  them  in  Germany,  flocked  to  Berlin 
and  established  agencies  for  the  purchase  and  sale  of  stocks  in  Lon- 
don, Paris,  Amsterdam,  and  New  York.  Seventy  such  offices  were 
opened  in  Berlin  within  one  year  after  the  law  was  passed,  and  did 
a  flourishing  business.  German  capital  was  thus  transferred  to 
foreign  markets.  The  Berhn  Exchange  became  insignificant  and 
the  financial  standing  of  Germany  as  a  whole  was  impaired. 

DETRIMENTAL  CONSEQUENCES 

This,  however,  was  not  the  most  serious  consequence  of  the  new 
law.  \\Tiile  bankers  and  brokers,  in  order  to  do  any  business  at 
all,  were  required  to  register,  their  customers  were  not  compelled 
to  do  so.  Consequently  the  latter  could  speculate  through  different 
brokers  on  both  sides  of  the  market,  pocketing  their  profits  and 
welching  on  their  losses  as  gambling  contracts.  Numerous  cases 
of  this  kind  arose,  and  in  some  the  plea  of  wagering  was  entered 
by  men  who  had  previously  borne  a  good  reputation.  They  had 
yielded  to  the  temptation  which  the  new  law  held  out  to  them. 

Another  consequence  was  to  turn  over  to  the  large  banks  much 
of  the  business  previously  done  by  independent  houses.  Persons  who 
desired  to  make  speculative  investments  in  home  securities  applied 
directly  to  the  banks,  depositing  with  them  satisfactory  security 
for  the  purchases.  As  the  German  banks  were  largely  promoters 
of  new  enterprises,  they  could  sell  the  securities  to  their  depositors 
and  finance  the  enterprises  with  the  deposits.  This  was  a  profitable 
and  safe  business  in  good  times,  but  attended  by  dangers  in  periods 
of  stringency,  since  the  claims  of  depositors  were  payable  on  demand. 
Here  again  the  law  worked  grotesquely,  since  customers  whose 
names  were  not  on  the  public  register  could,  if  the  speculation  turned 
out  badly,  reclaim  the  collateral  or  the  cash  that  they  had  deposited 
as  security. 

MODIFICATION   OF   LAW   IN    IQOcS 

The  evil  consequences  of  the  law  of  1896  broughl  ibout  its  partial 
repeal  in  1908.  By  a  law  then  passed  the  govern  aent  may,  in  its 
discretion,  authorize  speculative  transactions  in  inr-ustrial  and  min- 
ing securities  of  companies  capitalized  at  not  less  .han  $5,000,000; 
the  Stock  Exchange  Register  was  abolished;  all  persons  whose  names 
were  in  the  "  Handels-register "  (commercial  di  ectory),  and  all 
persons  whose  business  was  that  of  dealing  in  secur  ies,  was  declared 
legally  bound  by  contracts  made  by  them  on  tre  Exchange.  It 
provided  that  other  persons  were  not  legally  bond  by  such  con- 
tracts, but  if  such  persons  made  deposits  of  cash  or  ;ollateral  security 
for  speculative  contracts,  they  could  not  reclaim  them  on  the  plea 
that  the  contract  was  illegal. 

In  so  far  as  the  Reichstag  in  1896  had  aimed  to  prevent  small 
speculators  from  wasting  their  substance  on  the  Exchange,  it  not 


446  THE  STOCK  EXCHANGE  FROM  WITHIN 

only  failed,  but,  as  we  have  seen,  it  added  a  darker  hue  to  evils 
previously  existing. 

Germany  is  now  seeking  to  recover  the  legitimate  business  thrown 
away  twelve  years  ago.  She  still  prohibits  short  selling  of  grain 
and  flour,  although  the  effects  of  the  prohibition  have  been  quite 
different  from  those  which  its  supporters  anticipated.  As  there 
are  no  open  markets  for  those  products,  and  no  continuous  quotations, 
both  buyers  and  sellers  are  at  a  disadvantage;  prices  are  more  fluctu- 
ating than  they  were  before  the  passage  of  the  law  against  short 
selling. 

THANKS  TO  THE  CHAMBER  OF  COMMERCE 

Our  cordial  thanks  are  due  to  the  Chamber  of  Commerce  of  the 
State  of  New  York  for  the  free  use  of  rooms  in  its  building  for  our 
sessions,  and  of  its  library,  and  other  facilities. 

Respectfully  submitted,      Horace  White,  Chairman, 
Charles  A.  Schteren, 
DAvn>  Leventritt, 
Clark  Williams, 
John  B.  Clark, 
WiLLARD  V.  King, 
Samuel  H.  Ordway, 
Edward  D.  Page, 
Charles  Sprague  Smith, 

Maurice  L.  Muhleman,  Secretary. 


INDEX  ERRATA 

Business  Conduct  Committee,  255 

Margins,  insufficient  margins  prohibited,  255  and  256 

Manipulation  prohibited,  254 

Resolutions  adopted  by  the  Exchange; 

against  manipulation,  254 

against  light  margins,  255 

on  business  conduct,  255 


INDEX 

Asterisks  indicate  foot-notes 


Account     Day,    in    London, 

372-  .  . 

Advertising,  Abuse  of,  434. 

Advertising,  by  members 
prohibited,  56. 

Agents  de  Change,  51. 

Agents  de  Change  (see  Paris 
Bourse). 

Agora,  of  Greece,  262. 

Aldrich,   plan,    loi. 

AUard  A.,  Crises  in  France, 
219*. 

American  Acad,  of  Polit.  and 
Social  Science,  16*,  26*, 
32*,  80*,  102*,  191*. 

American  Bankers'  Associa- 
tion, 207. 

American,  finance  of  future, 

377; 

American  Institute  of  Bank- 
ing, 208*. 

Arbitrage  brokers,  duties  of, 
283. 

Ashley,  W.  T.,  on  Economic 
History,  224. 

Assignats,  390, 

Atlantic   Monthly,   288*. 

Bagehot,  Walter,  on  Cre- 
dulity of  Speculators,   92. 

Bagehot,  Walter,  on  Bank- 
ing, 99. 


Bagehot,  Walter,  on  Panics, 
215-218;     Lombard    Street, 

379- 

Balkan  Crisis  of  1912,  76, 
340,  368,  369. 

Banking  and  Currency  Prob- 
lem in  U.  S.,  by  Victor 
Morawetz,  209*. 

Banking  facilities  in  London, 
362. 

Bank  loans,  N.  Y.  (1904- 
1907),  190;  in  the  U.  S. 
(1904- 1 907)  192;  in  Lon- 
don, 362. 

Bank  of  England,  324,  328, 

357- 

Bank  of  England,  Origin  of, 
18*. 

Bank  of  France  and  cur- 
rency, 209;  and  Bourse, 
396;  and  Germany,  209. 

Banks,  certifications  of 
checks,  113;  borrowings 
by   London   brokers,    353. 

Bank,  deposits  in  N.  Y.,  125. 

Bankers     as      peacemakers, 

371. 
Bank  stock,  earliest  form  of, 

Baring,     A.,     on     Financial 

Crises,  219*. 
Baring  failure,  156,  376. 


447 


448 


INDEX 


Barnard,  Sir  John,  Act  to 
prevent  stock-jobbing,  226. 

Barometer,  The  Stock  Ex- 
change as  a,  23,  190,  308, 

309- 

Bearer  certificates,  365,  374. 

Bears,  Value  of,  76;  in  Ger- 
many, 77.  (See  short  sell- 
ing). 

Benefactions  and  charities  of 
members,  317. 

Bewes,  W.  A.,  Stock  Exchange 
Law  and  Practice,  379*. 

Bisschop,  W.  R.,  Rise  of  the 
London      Money     Market, 

379*- 

Black   Friday,   251. 

Blackmar,  Frank  W.  on 
Legislation  against  Specu- 
lation, 255. 

Bond  brokers  on'Change,  282. 

Borrowing  and  lending  stocks 
in  N.Y.  and  London,  353-4. 

Bourse,  Origin  of,  12*. 

Bourse,  Paris.  (See  Paris). 

Bradstreet's,  202*. 

Branch  offices,  426. 

Brokers  in  London,  relation 
to  jobbers,  335,  339;  me- 
thods, 372  et  seq.  (See 
London  Stock  Exchange). 

Browning,  R.,  on  Currency, 
219*. 

Bryce,  James,  on  Good  Citi- 
zenship, 133. 

Bucket-shops,    55,   143,  252, 

435- 
Bucket-shops,  War    against, 

149. 
Burr,  Aaron,  31. 
Burton,    Theodore     E.,     on 

Financial  Crises,  183*;  on 

Forecasting,  191,  197,  198. 


Burton,  Theodore  E.,  on 
Crisis-producing  condi- 
tions, 216*. 

Burton,  Theodore  E.,  on 
Currency,  208. 

Business  on  'Change,  how 
conducted,  288,  et  seq. 

Cable  service.  Excellence  of, 
284*. 

Cammack,  Addison,  on  pub- 
licity, 161. 

Capital  of  brokerage  houses, 

Capital,  reasons  for  scarcity 
of,  122;  exports  of  in  Lon- 
don, 366. 

Carry-over,  contango,  375-6*. 

Central    Bank    in    America. 

lOI. 

Certificates,  registered  and 
bearer,   365,   374. 

Certifications  of  stock- 
broker's   checks,    113. 

Chamber  of  Commerce,  N. 
Y.,  206. 

Chambre  Syndicale,  of  Paris 
Bourse,  393. 

Change  Alley,  327. 

Charities  and  benefactions 
of  members,  317. 

Chicago  Board  of  Trade 
Case  in  U.  S.  Circuit 
Court,  65;  in  U.  S.  Su- 
preme Court,  66*. 

China,  Speculative  possi- 
bilities in,  62. 

Clearance  Orders,  279. 

Clearing  House,  N.  Y. 
Banks,  109. 

Clearing  House,  N.  Y. 
Stock  Exchange,  119,  426; 
London,  365,   373. 


INDEX 


449 


Clearings,  volume  of,  in  N.  Y. 
and  London,  344. 

Coffee  Exchange,  442. 

Colbert,  and  the  French 
manufacturers,  254. 

Collectors,  on  'Change,  315. 

Collegium  mercatorum  at 
Rome,   16*. 

Commercial  honor  on 
'Change,  264. 

Commission  dealers  in  mar- 
kets for  produce,  8. 

Commissions,  rate  of,  N.  Y., 
278,  281;  in  London,  342; 
in  Paris,  395. 

Committee  of  Arrangements 
277.  _ 

Committee  on  Stock  List, 
requirements  of,   363. 

Companies  Act,  in  England, 
147*. 

"Comparisons"  by  stock- 
brokers, 120. 

Competition,  essential  to 
freedom    of   trade,    5. 

Comptroller  of  Currency, 
Report  of,  126*. 

Conant,  Charles  A.,  on  Ex- 
tablishment  of  prices,   28. 

Conant,  Charles  A.,  on  Short- 
sales,  89*,  93*;  on  manip- 
ulation, 175*. 

Conant,  Charles  A.,  on  Stock 
Exchange  Quotations,  29*. 

Conant,  Charles  A.,  on 
Value  of  American  Securi- 
ties, 14*. 

Consolidated  Stock  Ex- 
change, 428. 

Consols,  as  affected  by  war, 
368;  dealings  in,  374. 

Construction  News  (Chicago), 
202*. 


Contango,  375-6*. 

Control     of     members      by 

governors,  265. 
Conveniences    for   members, 

304- 

Cordage  Trust,  30,  311. 

Corner  in  Northern  Pacific 
stock,  290. 

Corners,  30;  opinions  of 
Hughes  Commission,  423. 

Corn  Laws,  History  of  the,  J. 
Shield  Nicholson,  255. 

Cost  of  Living,  8. 

Cotton  Exchange,  441. 

Coulisse,  in  Paris,  397,  ct 
seq;  membership,  398;  ori- 
gin, 401;  progress,  402; 
history,  404;  volume  of 
business,  405. 

Coulissiers,  51. 

Courtois,  A.,  on  manipula- 
tion, 175*;  Operations  de 
Bourse,  393*. 

Credit  Cycles  and  Origin  of 
Parties,  John  Mill,   204*. 

Crises  and  depressions,  183*. 

Criticism  of  the  Stock  Ex- 
change, 29. 

Crocker,  W.  H.,  on  depres- 
sions, 219*. 

Curb  market,  141,  431-2-3. 

Currency  and  the  panic  of 
1907,  206,  210. 

Currency,  famines  in 
America,  123;  inadequate 
laws,  352,  357;  contrasts 
with  London,  353. 

Currency,  panic  of  1893, 
199*. 

Daily  settlements  in  N.  Y., 

349- 
Daly,  Justice,  opinion,  236*. 


450 


INDEX 


Denis,  H.,  depressions,  219*. 

Denslow,  Van  Buren,  on 
Prices  and  Values,  6*. 

Depositors  in  banks,  num- 
ber of,   126. 

Depressions,  in  relation  to 
panics,  183*. 

Deutsche  Bank,  opinion  on 
Bourse  Law,  78,  243. 

Deutsche  Kapitalmarkt,  by 
Rudolph    Eberstadt,    32*. 

Dictionnaire  d' Economie  Poli- 
tique, by  Paul  Leroy- 
Beaulieu,  44*. 

Discipline,  as  maintained  on 
'Change,  266-7,  277. 

Disconto-Gesellschaft,  opin- 
ion on   Bourse   Law,   244. 

Discounting  the  future,  23. 

Disputes     and     differences, 
adjustment  of,  294. 

Diversions  of  members,  313. 

Doremus,  Robert  L.,  on 
transactions,  173*. 

Dresdner  Bank,  opinion  on 
Bourse  Law,  78,  244. 

Duguid,  Chas.,  Story  of  the 
Stock  Exchange,  32*. 

Eadie,  J  ,  on  panics,  219*. 
Eames,   Francis   L.,  on  The 

N.    Y.    Stock    Exchange, 

32*. 
East  India  Company,  325. 
Eberstadt,      Rudolph,      Der 

Deutsche  Kapitalmarkt,  32* 
Economics,    by    Francis    W. 

Blackmar,  255. 
Economiste    Franfais,     163*, 

349*-  . 
Economist,  London,  16,  18*, 
19,  197.  (See  Hirst,  Francis 
W.). 


Egyptian  Speculation,  62. 

Emery,  Henry  Crosby,  on 
Advantages  of  broad  specu- 
lative  markets,   61. 

Emery,  Henry  Crosby,  on 
German  Bourse  Law,  239, 
et  seq;  on  control  of  specu- 
lation, 256-7-8. 

Emery,  Henry  Crosby,  on 
Speculation  on  the  Stock 
Exchange  and  Produce 
Exchanges  of  the  U.  S.,  49*. 

Employes  on  'Change,  289, 
318. 

Etigineering  News,  202*. 

England,  capital  exports,  28. 

England,  Laws  of,  affecting 
company  organizations, 
147. 

England,  Laws,  of  affecting 
short  sales,  95. 

English  capital  in  America, 
20. 

English  Corn  Laws,  History 
of,  by  J.  Shield  Nichol- 
son 255. 

English  Economic  History, 
Introduction  to,  by  W.  T. 
Ashley,  224. 

Exchange,  Origin  of,    12*. 

Exchange  Register,  in  Ger- 
many,  241. 

Exchanges,  in  London  in 
early  days,  323. 

Exchequer,  English,  324*. 

Exports  of  capital  by  Lon- 
don, 366. 

Failures,  of  stockbrokers,  112, 
152,  156;  in  London,  331; 
in  Paris,  350,  395;  opinion 
of  Hughes  Commission, 
423- 


INDEX 


451 


Fairs,  in  primitive  coun- 
tries, 5. 

Farmers'   Alliance,   7. 

Farmers,  Speculation  by,  83. 

Faya.nt,Frank,Some  Thoughts 
on  Speculation,  32*,  68*, 
239,252*. 

Fictitious   transactions,   425. 

Financial  Crises,  etc.,  by 
Theo.  E.  Burton,  183*, 
191*. 

Financial   press    in    London, 

348; 

Fortnightly  Review,  on  panics, 
199*. 

Forum,  at  Rome,  262. 

France,  Volumes  of  Securi- 
ties in,  406. 

French  Government,  atti- 
tude toward  stockbrokers' 
monopoly,  401. 

Future  delivery,  transac- 
tions for,  In  France,  402, 
410;  in  America,  438. 

Gambling  as  distinguished 
from  speculating,  53,-54, 
417,    419,    421. 

Gambling  in  bucket-shops, 
144. 

Georges-Levy,  on  short  sales, 

93- 

German  Bourse  Law,  The,  by 
Geo.  Plochmann,  245*. 

German  Bourse  Law  of  1896, 
77,  236  et  seq.,  254;  opinion 
of  Hughes  Commission,  444. 

German  credit  in  1912,  372. 

German  Exchange  Act  of 
1896,  by  Dr.  Ernst  Loeb, 
238* 

German  Government  bonds, 
decline  in,  368. 


Germany,  Regulation  of  the 
Stock  Exchange  in,  61*. 

Gold  Room,  251,  307. 

Goldsmiths'  Notes,  in  Eng- 
land, 324. 

Gold  Speculation  Act  of 
1864,  249. 

Gossip  and  news  on  'Change, 

295- 

Gould,    Jay,    30. 

Government  bonds,  as  affec- 
ted by  war,  368. 

Governors  of  the  Stock  Ex- 
change on  Freedom  of 
Margin  transactions,  59*; 
on  Margin  transactions, 
52*;  on  Short  sales,  90; 
on  Usury  law,  105*;  on 
Incorporation,  235. 

Governors  of  the  Stock  Ex- 
change, their  power  over 
members,  139,  154;  method 
of  choosing,  266. 

Grain  Exchanges,  10. 

Grosscup,  Judge,  on  Value 
of  Stock  Exchange,  65. 

Guarantee  of  stockbrokers, 
154;  in  Paris,  395. 

Guild  of  Goldsmiths,  324. 

Guillard,  Edmond,  on  Origin 
of  Stock   Exchanges,    16*. 

Hadley,    Arthur   T.,    EconO' 

mics,  250. 
Harvard  Law  Review,  32*. 
Hatch  Anti-Option  Bill,  55, 

252. 
Hazing  of  new  members,  276. 
Hedging   in    cotton    futures, 

81,  94,  416,  439. 
Hirst,  Francis  W.,  on  Early 

Exchange  in  London,  327*; 

on  Stock  Exchange  rules. 


452 


INDEX 


330;  on  functions  of  job- 
bers, 336;  on  creation  of 
new  debt,  365*;  on  Chinese 
Speculation,  63;  Early 
English  Speculation,  18*; 
The  Stock  Exchange,  32*, 
45*,  63*. 

History  of  N.  Y.  Stock 
Exchange,  306. 

History  of  the  People  of  the 
U.  S.,  by  McMaster,  30. 

Hobbies  of  members,  312. 

Hocking  Coal  &  Iron  Com- 
pany, 30,  311. 

Holding    Companies,    429. 

Holidays  on  'Change,  301. 

Holmes,  Justice,  of  the  U.  S. 
Supreme  Court,  on  specu- 
lation, 66. 

Honor  and  character  on 
'Change,  264. 

Huebner,  S.  S.  on  Stock 
Exchange  safeguards,  25; 
on  Usefulness  of  bears,  78; 
on  discounting  future,  190. 

Hughes  Commission  on  Ger- 
man Bourse  Law,  245;  on 
Margins,  52;  on  Short 
selling,  80;  on  Curb  market 
142.  (See  also  Appendix.) 

Hughes  Investigation,  The, 
by  Horace  White,  64*. 

Hyndman,  H.  M.,  Com- 
mercial Crises,  219. 

Incorporation  of  Stock  Ex- 
change   (London),    231-5. 

Incorporation  of  Stock  Ex- 
change, N.  Y.,  139,  235, 
265;  opinion  of  Hughes 
Commission,  427. 

Ingall,  C.  D.,  The  Stock 
Exchange  (London),  32*. 


Insurance,  as  effected  by 
hedging,    81. 

Interest,  rates  of,  in  1909-10, 
116. 

Investors  in  France,  cau- 
tion of,  408. 

Inventor,  dependent  upon 
capital,  13. 

Investment,  its  relation  to 
speculation,  44. 

Investor,  Origin  of  word,  16. 

Jevons,  W.  S.,  on  prices,  7*. 

Jevons,  W.  S.,  on  sun- 
spots,  217. 

Jobbers,  in  London,  277, 
335;  relation  to  brokers, 
336,  340;  methods,  372 
et  seq. 

Johnson,  Joseph  F.,  on  panic 
of    1907,  208*. 

Jonathan's     Coffee     House, 

327- 

Journal  of  Accountancy,  regu- 
lation of  speculation,  258*. 

Journal  of  Commerce  and 
Commercial  Bulletin,  on 
Volume  of  Securities  in 
America,  15,  339- 

Journal  of  Political  Economy 
53*,  64*,  82*,  143*,  147*, 
159*,  196*. 

Jugiar,  Clement,  Des  Crises 
Commerciales,    185*,    219*. 

Kaffir  Circus  in  London,  62, 

365,    370,    376. 
Keene,  James  R.,  30. 


Labor,  Dependence  on 
Stock  Exchange,  43. 

Labor,  Percentage  of, 
America,  42. 


the 


INDEX 


453 


Laissez  faire,  theory  of,  253. 
Landells,  Walter,  on  London 

Stock  Exchange,  376-7*. 
Law    in    England     affecting 

companies,  147,  434. 
Law    in    England,    affecting 

short    sales,    95;    affecting 

specualtion,    225. 
Law    in    N.    Y.     regulating 

speculation,  247;  repealed 

248. 
Law,  John,  390*. 
Laws    affecting    short    sales 

in  U.  S.,  95,  246;  repealed, 

247;  decision  of  court,  416, 

420. 
Laws  of  France,  short  sales, 

404,  410. 
Laws  of  various  states,  affect- 
ing speculation,  251. 
Law,  Usury,  in  N.  Y.,  105*. 
Leeman  Act  of  1867,  227. 
Legislation  recommended  by 

Hughes  Commission,  435. 
Lending  andborrowingstocks, 

N.  Y.  and  London,  354-5. 
Leroy-Beaulieu,  Anatole,  on 

Paris  Bourse,  383    et  seq., 

387*. 
Leroy-Beaulieu,    Paul,    Nou~ 

veau  Dictionnaire  d'Econo- 

mic     Politique,     44*;     on 

Publicity,     163,     349;     on 

Speculation,  44. 
Lexis,  Dr.  W.,  on  Necessity 

for  Stock  Exchanges,  21. 
Liability  of  stockbrokers   in 

Paris,  395. 
Listing     of     new     securities, 

168;     N.   Y.    and    London 

363;  vendor's  shares,  364; 

opinion   of   Hughes    Com- 
mission, 424. 


Lloyds,  38. 

Lloyd,  W.  W.,  on  Panics, 
219*. 

"Loan    Crowd,"    290. 

Loans  by  banks  to  stock- 
brokers, no,  190. 

Lombard  Street,  by  Walter 
Bagehot,  92*,  379*. 

London  Exchanges  in  XVI 
Century,  323. 

London  Money  Market,  Rise 
of  the,  by  W.  R.  Bisschop, 

379*- 

London  Stock  Exchange, 
history  of,  326,  et  seq; 
management  of,  329;  rules, 
330,364*;membership,332, 
335;  stockbrokers,  332;  ad- 
mission, 332-3;  entrance 
fees,  etc.,  333 ;  capital  stock, 
333*;  precautions  against 
monopoly,  333;  jobbers, 
336-7-8;  commissions,  342; 
settlement  days,  344;  pub- 
licity, 347;  borrowings 
from  banks,  353;  transfers, 
355;  volume  of  business, 
356-7;  official  list,  358  et 
seq.;  securities  as  affected 
by  war,  368;  the  day's 
work,  372. 

London  Stock  Exchange, 
unincorporated,   267*. 

London,  The  world's  banker, 
366. 

Luncheon  Club,  The,  305. 

Manhattan  Banking  Com- 
pany, 31. 

Manipulation,  efforts  of  gov- 
ernors to  suppress,  169, 
174. 

Manipulation,  value  of,  170. 


454 


INDEX 


Manipulation,  opinions  of 
Courtois       and       Conant, 

175*- 

Manipulation,  opinion  of 
Emery,  257;  comment  of 
Hughes    Commission,  421. 

Margin,  speculation  on,  50, 
51,52. 

Margins  required  by  stock- 
brokers, 147. 

Margin  Trading  a  feature  of 
all  business,  58. 

Margin  Trading  a  matter  of 
contract,  53. 

Margin  Trading  defined  by 
Hughes  Commission,   419. 

Market  in  N.  Y.  compared 
with  London,  340. 

Market  in  Paris  as  affected 
by  stockbrokers'  mono- 
poly, 397  et  seq. 

Markets,  defined  by  Hughes 
Commission,     415. 

Markets  for  produce,  6. 

Marshall,  Alfred,  on  legis- 
lation, 255. 

Matched  orders,  422. 

AlcCulloch,  J.  R.,  Principles 
of  Economics,  46*. 

McMaster  on  Public  Senti- 
ment in  Early  Days,  30. 

McVey,  Frank  L.,  on  Stock 
Exchange  Usefulness,  41*. 

Mechanism  of  the  City,  The, 
by  Ellis  T.  Powell,  379*. 

Memberships,  how  obtained, 
271;  prices  of,  273;  value 
of,  274. 

Members  of  Stock  Exchange, 
interesting  personalities, 
2,12  et  seq. 

Memorial  of  Paris  stock- 
brokers, 88*. 


Metal  Exchange,  443. 
Meyer,  Eugene,  Jr.,  on  Panic 

of    1907,   196*,    203*. 
Middlemen    in    markets    for 

produce,  8. 
Mills,  John,  on  panics,  204. 
Mining  shares  in  London, 365. 
Mississippi  Bubble,  390. 
Mistakes  in  executing  orders, 

278,  293-4. 
Modern     Industrialism,     by 

Frank  L.  McVey,  41*. 
MoUien,    on    short    sales    in 

Paris,  89* 
Monetary     Systems     of    the 

World,     by     Maurice     M. 

Muhleman,  208*. 
Money     and     Banking,     by 

Horace  White,  251*. 
Money,  high  rates  for,  106*, 

116,  290,  353. 
Money,  rates  for,  as  affect- 
ing speculation,   118,  430; 

as     affected     by     deferred 

deliveries,  352. 
Monopoly,  on  London  Stock 

Exchange,  precaution 

against,     333;      of     Paris 

Bourse,  388  et  seq.,  399. 
Morawetz,    Victor,    on    cur- 
rency, 209*. 
Mortimer,  J.,  Every  man  his 

own  broker,  327*. 
Muhleman,      Maurice,      M., 

208*. 
Mulhall,     Michael     G.,     on 

Prices,  219*. 
Musicians  on   'Change,   316. 

Napoleon,   on    short   selling, 

87,  89*. 
National    Banks    contrasted 

with  State  Banks,  103. 


INDEX 


4SS 


National  Banks  of  U.  S., 
loans  (1904-1907),  192. 

National  Monetary  Com- 
mission, 426. 

New  Joanthans,   327. 

News  and  gossip  on  'Change, 
295. 

Newspapers,  attitude  toward 
Stock  Exchange,   132. 

"New     Tennessee,"  276. 

New  York  State  Food  In- 
vestigation Committee's 
report,  9* 

Neymarck,  Alfred,  on  vol- 
ume of  French  securities, 
406,  410. 

Nicholson,  J.  Shield,  on 
Corn  Laws.  255. 

North  American  Review,  icx)*, 

245*. 

Norton,  Eliot,  on  Purchase 
and  sales  of  securities,  32*. 

Norton,  Eliot,  on  short  sell- 
ing 86*. 

Notes,  of  stockbrokers,  iii. 

Odd-lot  brokers,  duties  of 
281;  extent  of  business, 
282. 

Open     Board     of     Brokers, 

307- 
Opinions  of  floor-brokers  as 

to  market,  297. 
Overend,     Gurney     &     Co., 

failure  of,  376. 

Panama  mania  in  France,  62, 

370,  408. 
Panic    of     1 907,     conditions 

antecedent  to,  24. 
Panic    of    1873,    in    Austria, 

197;    in     America,     199*, 

308. 


Panic  of  1825,  in  England, 
197;  of  1847,  in  England, 
376. 

Panic  of  1912,  in  Paris,  199, 
200,  369. 

Panic  of  1837,  in  U.  S.,  199*, 
308. 

Panic  of  1857,  in  U.  S.,  198-9, 
308. 

Panic  of  1893,  in  U.  S.,  197- 
8-9*. 

Panic  of  1907,  its  origin,  189; 
effect,  201. 

Panics,  crises  and  depres- 
sions, 183*. 

Panics  of  the  future,  184; 
opinion     of     Mills,      204, 

377- 

Paris  Bourse,  Balkan  Crisis, 
369;  after  war  with  Ger- 
many, 383-87;  Agents  de 
Change,  388  et  seq;  his- 
tory, 388-9;  the  form  of 
monopoly,  389;  origin  of 
monopoly,  389-390;  regula- 
tions, 391;  "right  of  intro- 
duction," 392;  exclusive 
privileges,  393;  settlements 
394;  _  prohibitions,  394; 
liabilities,  395;  rates  of 
commission,  395;  methods 
and  transactions,  396  (see 
coulisse);  objections  to 
monopoly,  398  et  seq; 
differences  with  the  cou- 
lisse, 404;  volume  of  busi- 
ness, 405;  caution  of  pub- 
lic, 408. 

Paris  Bourse,  History  and 
Methods  of,  by  E.  Vidal, 
392*. 

Parquet,  in  Paris,  397  et 
seq. 


456 


INDEX 


Partners    of    members,    and 

partnership       agreements, 

270-1. 
Pears  Prize  Essays,  219*, 
Personalities  on  'Change,  312 

et  seq. 
Plochmann,  George,  on  Ger- 
man Bourse  Law,  245*. 
Powell,  Ellis  T.,   The  Mech- 

ism  of  the  City,  379*. 
Pragmatism,     in     economic 

phenomena,  127. 
Prices,  Relation  to  value,  4. 
Principles  of  Economics,   by 

Alfred  Marshall,  255. 
Principles  of  Economics,   by 

Edwin    R.    A.    Seligman, 

42*,  254. 
Principles  of  Economics,  by 

J.  R.  McCulloch,  46*. 
Principles     of     Money     and 

Banking,     by     Chas.     A. 

Conant,  93*. 
Produce  Exchange,  440. 
Promoters,  swindles  of,   141. 
Publicity  in  N.  Y.  contrasted 

with  London,  347. 
Pujo.  Committee,  176. 
Punishment      of     members, 

267. 
Pyramiding,       opinion       of 

Hughes  Commission,  420. 

Quarterly  Review,  London,  300 

332,  377*- 
Quotations,  the  property  of 
the    Exchange,    436. 

Railroads  in  U.  S.,  in  1906- 

7,  212. 
Real  Estate,  Market  for,  22. 
Real      Estate      Record      and 

Guide,  202*. 


Real  Estate  Speculation,  in 
N.  Y.,  202;  in  other  cities, 
203. 

Receiverships,  430. 

Reforms,  attitude  of  mem- 
bers toward,  311;  in  list- 
ing new  securities,  364. 

Regulation  of  Stock  Ex- 
change in  Germany,  Henry 
Crosby  Emery,   241*. 

Rentes,  as  affected  by  war, 
368;  settlement  days,  394; 
market   for,    398,  404. 

Rhodes,  Cecil,  377. 

Rise  of  the  London  Money 
Market,  by  W.  R.  Biss- 
chop,  379*. 

Roosevelt,  Theodore,  and  the 
panic  of  1907,   210-212. 

Royal  Commission  of  1877, 
—  238-9,    231-2. 

Rubber  boom,  in  London,  62, 

369- 

Russian  government  bonds, 
as  aifected  by  war,  368. 

Russian  industrial  securi- 
ties in  France,  62. 

Salaries  of  employees,  318. 

"Scalping,"  355. 

Scapegoat,  making  the  Stock 
Exchange  a,  137. 

Schonberg,  "Handbuch"  on 
Speculation,    21*. 

Scott,  S.  R.,  on  incorpora- 
tion of  London  Stock 
Exchange,  233. 

Securities,  Origin  of,  11. 

Securities,  Owners  of  in 
America,  14-15- 

Securities,  Volume  of  in 
America,  14-15. 


INDEX 


457 


Securities,  Volume  of  in 
London,  360;  in  Paris, 
406,  et  seq;  in  N.  Y., 
359-60.      . 

Seligman,  Edwin  R.  A.,  on 
Legislation,  254. 

Seligman,  Edwin  R.  A.,  on 
Principles  of  Economics, 
42*. 

Settlement  days,  London 
Stock  Exchange,  344,  349; 
N.  Y.  Stock  Exchange, 
345;  comparisons,  351. 

Settling  Room,  in  London, 
372. 

Shanghai  Stock  Exchange, 
62. 

Sherman  Law,  199*. 

Short  selling,  opinion  of 
Prof.  Huebner,  78;  legal- 
ized in  Paris,  402*;  opin- 
ion of  Court,  416;  opinion 
of  Hughes  Commission, 
420. 

Silver  purchasing  clause,  re- 
peal of,  199*. 

Smith,  Adam,  on  Specula- 
tion, 37. 

Smith,  Adam,  The  Wealth  of 
Nations,  37. 

Smith,  C.  W.,  on  depressions 
219*. 

Smith  Herbert  Knox,  on 
hedging  cotton,  94. 

Smith,  Hopkinson,  on 
methods  of  brokers,  292. 

Smollett,  on  South  Sea  Bub- 
ble, 325-6. 

South  Sea  Bubble,  226,  325. 

Spanish  government  bonds, 
as  affected  by  war,  368. 

Specialists,  duties  of,  278; 
vindications  of,  279;  opin- 


ion   of    Hughes    Commis- 
sion, 426. 

Speculation,  a  feature  of  all 
enterprise,  38. 

Speculation,  in  America  con- 
trasted with  that  abroad, 
62. 

Speculation,  in  American 
development,  307;  con- 
trasted with  England,  366; 
in  France,  408-9. 

Speculation,  in  China,  62. 

Speculation,  in  Egypt,  62. 

Speculation,  in  France,  62. 

Speculation,  in  Gold,  (1864, 
1866),  250. 

Speculation,   in   London,  62. 

Speculation,  in  relation  to 
investment,  44. 

Speculation,  J.  S.  Mill,  47. 

Speculation  not  gambling, 
53,    54,  416,  417,  419,  421 

Speculation  on  the  Stock  y 
Produce  Exchanges  of  the 
U.  S.,  by  Henry  Crosby 
Emery,  49*. 

Speculation,  opinion  by 
Judge  Grosscup,  65. 

Speculation,  opinion  by  U.  S. 
Supreme  Court,  66. 

Speculation,  origin  of  the 
word,  36. 

Speculation,  Some  Thoughts 
on,  by  Frank  Fayant,  32*, 
68,*  239,  252*.  _ 

Speculation,  as  distinguished 
from  trading,  74. 

Sponsors  of  candidates  for 
memberships,     272. 

Sportsmen  on  'Change,  317. 

Stamp  Tax,  N.  Y.,  75;  in 
London,  355. 

Stanhope,  Edward,  on  incor- 


458 


INDEX 


poration  of  London  Stock 

Exchange,  232. 
State  Banks  contrasted  with 

National  Banks,    103. 
Statist,     The     (London)     on 

Hughes  Investigation,  256. 
Stockbrokers  in  London  (See 

London  Stock  Exchange); 

in  Paris,  (Paris  Bourse). 
Stock  certificates,  registered 

and  bearer,  365. 
Stock  companies  in  France, 

410-11. 
Stock     Exchange     and     The 

Money  Market,  by  Horace 

White,  IC2. 
Stock     Exchange,     Distinc- 
tion between  Wall   Street 

and,  64. 
Stock     Exchange     Law     and 

Practice,  by  W.  A.  Bewes, 

379*- 
Stock  Exchange  (London),  by 
C.  D.  Ingall  &  G.  Withers, 

32  • 

Stock  Exchange,  N.  Y., 
Rules  governing  brokers, 
138,  the  day's  work  288 
et  seq. 

Stock  Exchange,  N.  Y.,  the 
building,  304-5;  history, 
307;  mechanism,  418. 

Stock  Exchange,  Story  of  the, 
by  Chas.  Duguid,  32*. 

Stock  Exchange,  The,  by 
Francis  W.  Hirst,  32*,  45*. 

Stock  Exchange,  The  (Lon- 
don) Francis  W.  Hirst, 
327*,   330*,   338,   367.* 

Stock  Exchange,  The  N.  Y., 
by  Francis  L.  Fames,  32*. 

Stockholders,  Rights  of,  162, 
164,  173*. 


Stocks  and  Shares,  by  Hart- 
ley Withers,  379.* 
"Switching,"  74.. 

Telephone  clerks,  on  'Change, 
their  duties,  289. 

Temperature  of  air  on 
'Change,  how  regulated, 
305. 

Ten  years  regulation  of  the 
Stock  Exchange  in  Ger- 
many, by  Henry  Crosby 
Emery,  61*. 

Ticker,  value  of,  162*;  in 
London,    341-2;  in   N.  Y,, 

.347,  437- 
Ticket  Day  in  London,  373. 
Timidity  of  capital,   17. 
Tontine  Coffee  House,  307. 
Tooke,  Thos.,  on  Prices,  7*. 
Traders,     as     distinguished 

from     speculators,     74; 

operations  of,   285. 
Trading   posts,  on    'Change, 

289. 
Transactions     in     securities, 

panic  of  1907,  216. 
Transactions  on 'Change,  how 

conducted,   288,   et  seq. 
Transfer    of    certificates,    in 

London,   355,   365,   374. 
Transfer  Tax,  in  N.  Y.,  75, 

in  London,  355. 
Trust     Laws,     attitude     of 

brokers  toward,  311. 

Unlisted     Department    of 

Stock  Exchange,   166. 
Usury  Law,  in  N.Y.,  105,  431. 

Values,  Relation  to  prices,  4. 
Van  Vorst,  Justice,  opinion, 
236*. 


INDEX 


459 


Vendors'  shares,  in  London, 

364. 

Vidal,  E.,  History  and 
methods  of  Paris  Bourse, 
392,  monopoly  of  Bourse, 

.399,  401*,  403,  404-  . 
Vidal,     E.,     on     Origin     of 

Bourse     and      Exchanges, 

12*. 
Villeplaine,    Boscary    de,    on 

short   selling,   88. 
Visitors'  Gallery,  286. 

Wall  Street  and  the  Country, 
by  Chas.  A.  Conant,  29,* 

175*- 

Wall  Street,  distinction  be- 
tween the  Stock  Exchange 
and,  64. 

Wall  Street  Journal,  83*,  136, 
139,  145,  165*,  173*,  178*, 
372*. 

Wall  Street  not  the  Stock 
Exchange,  428. 

War,  between  England  and 
a  first-rate  power,  367,  et 
seq. 

War,  cost  of,  367. 

War,  Franco-German,  383, 
et  seq. 

"Wash  Sales,"  168,  422. 

"Welchers,"  227,  249;  in 
Paris,  402. 

Wealth  of  Nations,  The,  37. 

White,  Horace,  on  banking 
laws,  102,  104;  on  com- 
pany promoters,  142,  147*; 


on  gold  speculation,  251; 
on  margin  transactions, 
53*;  on  money  rates, 
115;  on  short  selling,  80; 
on  Stock  market  quota- 
tions, 15;  on  the  distinc- 
tion between  Wall  Street 
and  the  Stock  Exchange, 
64;  on  the  Hughes  Com- 
mission, 159;  on  the  panic 
of  1907,  196;  on  the  panics 
of  1837,  1857  &  1873,  199*. 

Withers,  G.,  The  Stock  Ex- 
change (London),  32*. 

Withers,  Hartley,  Stocks  and 
Shares,  379*. 

Witwatersrand,  discovery  of 
gold  in,  365. 

Wood,  Henry,  Political 
Economy,  219*. 

Woolley,  C.,  Phases  of  Panics 
219*. 

World's  Wealth  in  Securities, 
by  Chas.  A.  Conant,  288*. 

World's  Work  The,  294*. 

Worry  on  'Change,  302  et 
seq. 

Worry  the  Disease  of  the  Age, 
by  Dr.  C.  W.  Saleeby  304*. 

Yale  Review,  61*. 

Yale  Review,  on  German 
Stock  Exchange  Law,  241*. 

Yale  Review,  on  panic  of 
1907,  196*. 

"Yankee  market,"  in  Lon- 
don, 300. 


THE  COUNTRY  LIFE  PRESS 
GARDEN  CITY,  N.  Y. 


AA    001  118  697   0 


